Highlights

In 2017, all facets of Chinese poultry will likely be affected by China’s response to continued Avian Influenza (AI) detections, both within China and overseas. In terms of production, despite the continued modernization of China’s production industry, these potential gains have been offset by China’s AI bans against key suppliers of grandparent stock.

These bans have caused significant disruptions in domestic white-feathered poultry production that will likely continue to constrain production throughout 2017. In addition, outbreaks of AI in China among the human population have been linked to traditional live poultry markets, the most popular outlet for Chinese yellow-feathered poultry, leading to a number of bans on live poultry markets and lessening yellow-bird demand. Finally, because of the AI ban against the United States and many European broiler meat importers, poultry imports from a few South American countries and Poland have skyrocketed.

Production

While 2017 may be the Year of the Rooster in China, Post forecasts that China’s domestic broiler meat production will continue its two-year decline, and lowers its 2017 production forecast by 11 percent to 11.0 million metric tons (MMT). The primary reasons for the production decline are two-fold: (1) domestic white bird flocks account for the majority of poultry production by volume and this volume continues to shrink due to the lack of new grandparent breeding stock and (2) the overall domestic demand for broiler meat (both yellow and white) is weaker than in previous years due to the growing popularity of higher-end proteins like beef, mutton, and seafood.

China’s domestic poultry production is composed of four different types: yellow-feathered birds, white-feathered birds, mixed (yellow and white), and culled egg-layers. In terms of geography, yellow birds are generally produced in the South and white birds in the North. Shandong Province is by far the largest poultry producing province, producing over 15 percent of China’s total broiler production. However, in terms of growth among the major producing regions, Sichuan, Fujian, Liaoning, and Anhui Provinces have experienced strong growth, driven in large part by the consolidation of the industry. Large poultry producers, like the Fujian Sunner Group have been expanding and modernizing its operations.

In addition, the traditional poultry producing provinces of Guangdong and Jiangsu have seen poultry production drop significantly. This drop is attributable to two main factors: environmental concerns around highly populated urban centers and a shift in production from South to North, yellow to white. The slow shift from yellow to white bird production is explained by the increased productivity (and therefore profitability) of white bird production, a shift away from traditional Chinese consumption preferences, and increased biosafety concerns regarding AI transmission in traditional live poultry markets.

Many attributes of the white bird naturally lend themselves to a more productive—and usually more profitable—operation. Not only do white birds boast a higher feed to meat ratio, but also gain weight faster, are harvested earlier, and average a heavier total slaughter weight. However, recent production gains made possible by this shift to white bird production are currently offset by several factors, the most notable of which are the current Chinese bans on new grandparent breeding stock from the United States and several EU countries. As a result of these constraining factors, Post forecasts a continuing decrease in overall broiler production.

2017 Production Constrained by Lack of New Breeding Stock

Post forecasts that, despite an increase in mixed bird production and stable yellow bird production, the lack of new grandparent breeding stock for white bird flocks will remain the greatest obstacle to increasing domestic poultry production. The majority of Chinese white bird breeding stock is imported from abroad and most major suppliers have been cut off as a result of AI detections in their home country. In January 2015, the United States, which supplied 90 percent of China’s white bird grandparent stock in 2014, was banned from exporting breeding stock to China.

In response to this new AI trading risk, the Chinese poultry industry is attempting to develop a domestic breeding industry. For example, a large Chinese poultry firm Shandong Yisheng, recently signed a 10 million dollar US$, three-year contract with the French genetics firm Hubbard to import great-grandparent stock, primarily from France, but also from other locations located around the world that are unaffected by the ban. However, this strategy requires significant scientific and technical expertise which the Chinese poultry industry cannot yet implement on a large, commercially-viable scale. Post will be monitoring the situation to determine whether or not this strategy will relieve some of the pressure created by AI bans around the world.

In addition, China continues to use the practice of “forced molting” to increase egg production from its imported grandparent and parent stock. Forced molting is a process whereby artificial conditions are introduced into the growing environment to induce the natural molting process. After the breeders have undergone molting and entered phase 2 of their laying cycle, their average egg production rate increases. However, this technique is not widely practiced in most modern poultry industries due to animal welfare concerns. In addition, there are concerns about poultry mortality rates during the induced molting phase and a decrease in hatchability rates following phase 2. Through its use of forced molting, China has managed to soften the blow from the lack of new grandparent stock, but is still unable to find a long-term alternative. Therefore, the white bird production will still see a decrease in 2017.

In addition to production losses from a lack of new breeding stock, AI can also affect China’s domestic production due to disease outbreaks. In 2016, China did not record any major outbreaks in commercial poultry flocks. However, in late 2016, China reported over a hundred laboratory confirmed cases of human infections from avian influenza A(H7N9) virus. The vast majority of these cases were traced to live poultry markets. In response to these human outbreaks, Chinese provincial governments in Zhejiang, Guangdong, and Anhui provinces have strengthened their live poultry market regulations. In Jiangsu Province, some prefectures have outright banned live poultry markets. These human AI-related concerns are significant and have contributed towards the shift away from yellow-bird production and contributed to the growth in market share of white birds. The United States has never had a confirmed case of avian influenza A(H7N9) virus. Human infections of other subtypes of avian influenza have only rarely been reported in the United States Separate from AI-related issues, production costs in China have decreased as efficiency gains are realized and feed costs remain low. As discussed above, the shift towards high efficiency, high-output white broiler production should result in production gains. However, due to the lack of grandparent stock to sustain this type of system, many poultry facilities run at less-than-full capacity and these production gains remain unrealized.

Another factor that influences production is feed cost. The main feed components in China are corn and soy. In 2017, poultry farmers will continue to enjoy low feed costs as government stockpiles continue to be released into the market. This balancing of the China State Grain Reserves began in 2016 and is expected to continue throughout 2017. Due to the low feed costs, the domestic price of chicken continues to decrease, thus weakening the demand for imported poultry. A final factor that influences production is China’s growing attention to environmental issues. In the last five years, China’s central government has implemented policies that have encouraged poultry farming away from crowded urban areas. These policies have contributed to the shift in production from yellow to white bird, and South to North. However, the Chinese poultry industry is less affected by environmental constraints than other animal livestock sectors, like swine.

Consumption

Overall, broiler consumption in China has decreased and will continue to decrease throughout 2017. The first change is AI-related. Because AI is most commonly transferred from poultry to humans in traditional wet markets selling live chickens, Chinese regulators have begun to close these wet market outlets, encouraging consumers to purchase fresh-slaughtered poultry at retail outlets. As a result, while white bird production has been shrinking due to the lack of new breeding stock, which should normally encourage growth in yellow bird flocks, it appears that yellow bird flocks are not increasing to fill the market void because of these biosafety concerns at wet markets.

The second change is related to China’s overall economy. As China’s roaring growth slows to a more sustainable level, and labor costs continue to increase, manufacturing companies have been moving factories out of China into lower-cost markets, like Bangladesh and Malaysia. These factories generally have an onsite cafeteria and prefer to use white bird meat because of the cost-savings. But with the shuttering of so many factories, especially in Southern China, the consumption at factory canteens has dropped, reducing overall white bird consumption.

A third change that has contributed to China’s decreased appetite for poultry is a change in the middle-class diet. As middle class families become more wealthy, they are consuming less poultry (either yellow bird or white bird) and consuming more beef, mutton, and seafood. In addition, duck and goose are becoming more widely available to urban dwellers through specialty shops and enjoy the perception of being healthier than chicken.

Trade

Imports Will Increase in 2017, But Will Be Limited to a Few Markets:

As China’s domestic production struggles, China’s poultry imports will likely increase in MY 2017, up from 550,000 MT to 600,000 MT, making China the world’s second largest poultry importer, behind Mexico. With the United States out of the market due to Chinese, Brazil has pecked its way to the top, accounting for over 85 percent of China’s broiler meat imports. Brazil’s recent meteoric rise was possible as Brazil filled a vacuum created by AI-related bans in the United States and Europe. In addition, Chinese regulators continue approving Brazilian poultry production facilities for export at an unusually fast rate. Lastly, the depreciation of the Brazilian Real relative to the Chinese Yuan has also contributed to Brazil’s export success. With the United States and Europe essentially out of the poultry meat market, Chinese demand for South American poultry has Brazil, Argentina, and Chile, crying “winner-winner chicken dinner.”

China’s Trade Policies Unfairly Hurt U.S. Exporters:

China imposes AI-related import restrictions that are inconsistent with the World Organization for Animal Health (OIE) guidelines. China requires countries to be free of both Highly Pathogenic AI (HPAI) and Low Pathogenic AI (LPAI) for at least 90 days before these countries can submit an application for removal of the ban. On the other hand, the internationally-recognized OIE guidelines recommend that countries be free of only HPAI (i.e., do not place a country-wide ban for LPAI). Another difference in the Chinese system is that once a country has fulfilled the necessary OIE requirements, China still requires that the country submit to a separate application process to lift the ban. This process is opaque and can take many months, if not years. For example, the United States has been requesting removal of the HPAI restriction since April 22, 2016 (i.e., the waiting time recommended by the OIE guidelines), but China has yet to recognize the United States’ HPAI-free status as determined by the OIE. Furthermore, China continues to implement country-wide bans in reaction to AI detections, ignoring the OIE guidelines which recommend regionalization (or zoning) methods. For geographically large countries, that have widely dispersed poultry productions like the United States, Canada, France, and China, regionalization is an important risk-mitigation tool that can be safely applied in a scientific manner to minimize trade disruptions.

In addition, China has placed significant anti-dumping (AD) duties on U.S. poultry and poultry products. In 2013, a World Trade Organization (WTO) consultation panel found that China’s imposition of higher AD duties on chicken broiler products – which caused an 80 percent drop in U.S. exports – was unjustified under international trade rules. Even when the appellate body again found in favor of the United States, China has refused to comply with the WTO ruling to remove its AD duty on U.S. poultry. To date, the United States has not enacted any of the countermeasures it is allowed to invoke in the face of this non-compliance.

China’s Poultry Exports Remain Essentially Flat:

Post forecasts that China’s exports of broiler meat in MY 2017 will decrease by 1.4 percent to 350,000 MT as a result of tightening domestic supply. Although China is a net importer, it continues to be the primary poultry supplier to Japan and Hong Kong. China’s main exports to Japan are processed chicken (e.g., skewered chicken) and its main exports to Hong Kong are fresh/chilled cut chickens for retail sale.

China Broiler Meat Production, Supply, and Demand

China

Jan 2015

Jan 2016 (adjusted )

Jan 2017 (forecast)

New

Post

USDA

Official

New

Post

USDA

Official

New

Post

Slaughter (Reference)

10100

10100

9800

9800

8300

8800

Beginning Stocks

0

0

0

0

0

0

Production

13400

13400

12700

12300

11500

11000

Total Imports

268

268

410

440

550

600

Total Supply

13668

13668

13110

12740

12050

11600

Total Exports

401

401

395

385

345

350

Human Consumption

13267

13267

12715

12355

11705

11250

Other Use, Losses

0

0

0

0

0

0

Total Dom.

13267

13267

12715

12355

11705

11250

Total Use

13668

13668

13110

12740

12050

11600

Ending Stocks

0

0

0

0

0

0

Total Distribution

13668

13668

13110

12740

12050

11600