China's broiler industry has not had a good start to the year. Misplaced consumer fears over media reports about "fast-growing" chickens, together with the inappropriate use of antibiotics, dented consumer confidence in broiler meat and depressed demand badly. And just as things were expected to get better in March and April, avian influenza H7N9 caused further damage to the industry, with consumption declining by some 70 percent - the biggest drop in recent years.
Yet against this difficult background and despite low profitability and losses, some major chicken companies continue to invest to strengthen their market positions by completing production chains and improving disease prevention and food safety. Seeing the longer-term picture, they are looking to expand production and increase market share.
Poultry companies hit by crises
In December 2012, a report was broadcast by China's national television station that some broiler farmers working for the Liuhe Group - one of the biggest broiler producers in the country - had been including antibiotics registered for human use in poultry feed. It was also reported that supervision and inspection of their farms were not taking place. Subsequently, several of the Liuhe Group's broiler farms and slaughter facilities were closed.
On the back of this, consumption of chicken meat fell and the entire broiler industry was affected. As a consequence, share prices in many of the country's main broiler producers fell. For example, the New Hope Group, the parent company of Liuhe, saw its share price fall by 7 percent, while Minhe Animal Husbandry's prices dropped by 1.6 percent.
These recent crises have come on the back of a difficult period for the chicken industry. Purchasing power in China continues to decline, yet more poultry producers are entering the market, meaning that supply is exceeding demand. Prices are falling. Yet against this, feed and ingredient costs have risen dramatically, which are negatively affecting profitability.
For example, Sunner reported a net profit of RMB 2.693 million (US$437,400) in 2012, a decrease of 99.53 percent compared to the previous year. Da Chan Food, which had its products 100 percent certified, posted an annual net profit of RMB 72.04 million (US$11.69 million), a contraction of 63.3 percent. Mihne saw sales collapse by 144 percent in 2012, reporting a loss of RMB 82.347 million (US$13.37 million).
Yet, these poor financial results are not the end in the story of broiler producers' difficulties, and by late March 2013, three humans had been infected with H7N9. To control the outbreak, the government decided to shut down live poultry markets in many areas and cull flocks. Consumers turned away from poultry, causing further damage to the industry from which it has yet to recover.
According to Liu Yonghao, CEO of the New Hope Group, the company's broiler sales in East China have contracted by 50 percent in the first quarter of 2013, while the Wens Group, the largest broiler company in the south of China, saw volume demand contract by 85 percent. The company has been recording daily losses of RMB 30 million (US$4.87 million). In the Anhui Province, Hewei is thought to be losing RMB 3 million (US$487,200) every day.
Lessons and change from the crisis
The crisis has led to period of introspection, with company leaders asking themselves how these problems arose and what should be done next.
For some, a review of the current breeding model is being considered. The current model, known as "company+farmer," is similar to the contract farming model. However, the problem with this model is thought to be the lack of supervision. Even if a company wants to ensure that all of the farmers with whom it works are operating in the right way, there will always be someone who is not, and it is impossible to know who and where they are.
There are two alternative choices under consideration. Either to adopt a full industrial chain model, as Sunner has done, or to revise the company+farmer model to a company+family farm model, which is being practiced by Wens in southern China.
Another area of focus is consumer attitudes. Chinese consumers know little about how the industry operates or how its products are produced. Additionally, there is little trust in the poultry industry. Individual companies, and the industry as a whole, have started to realize that they do not have enough communication with customers or the media. Their job is no longer to simply produce chicken meat, but to tell people how they do it.
Despite the crisis, China's major poultry producers are continuing to search for growth and market share, and a variety of approaches are being employed.
Sunner, for example, has been establishing cooperation agreement with global food companies. In 2012, it signed a joint-venture agreement with OSI, which will see the formation of a new company. The total investment is expected to reach RMB 1.5 billion (US$243.6 million) and will comprise 10 breeder farms, 34 broiler farms, a feed mill, a processing plant and a hatchery. Once fully operational, the complex will produce 60 million broilers per annum. More recently, Sunner has entered into an agreement with Yum!, and one of its subsidiaries will become a supplier to KFC in China.
The Liuhe Group is focusing on areas including further processing and retail. The company has invested RMB 100 million (US$16.25 million) in a cooked food processing plant, which can produce in excess of 600,000 tons of cooked food per annum. Additionally, the company has opened its own retail outlet in Shangdong Province, selling cooked chicken and duck products.
In the south of China, the Wens Group is researching and implementing its own breeding model. The company has changed from company+farmer to company+family farm, which is in compliance recently published government No. 1 Central Profile. The initiative attracted the attention of the country's authorities and, in March this year, the head of the Animal Husbandry Department of the Ministry of Agriculture visited Wens and its family-run farms.
The Doyoo Group, in the Henan Province, is investing RMB 2 billion (US$325 million) in a broiler industrialization project. The project comprises a hatchery with a capacity of 100 million chicks per annum, a slaughter and processing plant, a feed mill, a cooked food processing facility and 40 breeding facilities.
Over recent years, some of China's largest poultry producers have extended their operations into areas of the country away from their headquarters, making them increasingly national rather than regional companies.
The Jiulian Group, for example, which has its headquarters in Qingdao, Shandong Province, has invested RMB 2 billion (US$325 million) to establish a broiler development, known as "New Julian," in the Guangxi Zhuang Autonomous Region. The project includes breeder breeding, feed mills, broiler production, slaughter and processing facilities, cooked food processing, logistics and an export division.
The Wens Group, which is based in Guangdong Province, now has operations across 23 provinces, and operates over 160 subsidiaries.
Taiwan's DaChan, which established its headquarters in Hong Kong, now has operations in Heilongjiang, Jilin, Liaoning, and Hunan provinces, and in Shanghai and Tianjin city.
The broiler industry is the most industrialized of all the animal protein sectors in China, and both by size and in terms of quality, it is catching up on producers in developed countries. Those companies that are able to withstand the crises will emerge stronger, and along with these challenges will come consolidation.