Required Report - public distribution

**Date:** 2/12/2004

**GAIN Report Number:** CH4004

CH4003

**China, Peoples Republic of**

**Poultry and Products**

**Semi-Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy

**Prepared by:**

Casey E. Bean & Zhang Jianping

**Report Highlights**: During 2004 the detection of avian influenza in
China, SE Asia and the United States will temporarily change the picture
of China's poultry product trade. On February 7, 2004, China suspended
imports of all US poultry products due to the outbreak of H7 avian
influenza in the State of Delaware. As a result, China's total poultry
imports during 2004 are forecast to fall about 25 percent to 300,000 MT.
China's outbreak of highly pathogenic avian influenza (H5N1) resulted in
over 40 countries banning the country's poultry products. Accordingly,
China's poultry exports are estimated to decrease 15 percent from
388,000 Mt to 311,000 MT. Assuming China's AI situation is brought under
control within several months, consumption levels recover and the
industry replenishes poultry flocks, post forecasts China's poultry
production will remain flat during 2004.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[Summary 3](#summary)

[Production 4](#production)

[China's broiler production during 2004 forecast to remain the same as
last year
4](#chinas-broiler-production-during-2004-forecast-to-remain-the-same-as-last-year)

[Predominant broiler distribution at widely dispersed wet markets
challenges China's efforts to modernize veterinary and food safety
practices
4](#predominant-broiler-distribution-at-widely-dispersed-wet-markets-challenges-chinas-efforts-to-modernize-veterinary-and-food-safety-practices)

[Trade 5](#trade)

[China's total poultry imports forecast to fall 25 percent during 2004
due to avian influenza and continued import restrictions
5](#during-2004-chinas-total-poultry-imports-forecast-to-fall-25-percent-from-posts-previous-estimate-due-to-avian-influenza-and-continued-import-restrictions)

[Exports 5](#exports)

[PSD Table 7](#psd-table)

[Tariff Table 8](#tariff-table)

# Summary

During the first half of 2004, China's poultry market picture will be
impacted by the outbreak of avian influenza in China, other SE Asian
countries and the State of Delaware in the United States.

China suspended imports of US poultry and poultry products on February
7, 2004. As a result, China's broiler imports during 2004 are forecast
to decrease about 10 percent from 329,000 MT to 297,000 MT on the
assumption that China will resume imports from the United States within
three months. In this report post also calculated 2002 and 2003 broiler
import numbers using FAS Dairy, Livestock and Poultry Division's
methodology. The figures were only slightly different from our original
estimated found in our 2003 poultry product annual (CH3119). In the
past, post did not have access to Hong Kong's re-export numbers. To
calculate the new import figures, we used the World Trade Atlas (WTA) to
calculate China's total world imports, then we subtracted Hong Kong from
China's total imports, then we subtracted Hong Kong's chicken paw
re-exports to China to get broiler meat re-exports to add back to
China's imports, then we subtracted total US paws and spent hens
exported to China.

During 2004, China's poultry product exports are forecast to fall to
311,000 MT, a decline of about 20 percent from last year, due to the
ongoing outbreak of highly pathogenic avian influenza (HPAI), ­H5N1.
About 41 countries have closed their markets to China's poultry
products. According to ministry contacts, Chinese officials are now
negotiating market access with these countries.

Finally, China's broiler production in 2004 is forecast at 10 MMT
(million metric tons), the same as last year. This forecast assumes that
China's AI situation is brought under control within several months,
that poultry product consumption levels recover and that China's poultry
industry replenishes flocks culled or lost due to HPAI. Post revised
upwards the 2003 broiler production figure from CH3119 (dated 9/8/03)
from 9.8 MMT 10 MMT, based on a recent forecast of the Ministry of
Agriculture.

Please refer to post's most recent poultry report, CH4002, for more
information about China's HPAI situation and government responses.

# Production

## China's broiler production during 2004 forecast to remain the same as last year

China's broiler production for 2004 is forecast to remain flat at 10 MMT
due to the outbreak of HPAI in China limiting any growth typically seen
year to year in this country. If the disease only impacts the market
during February and March, production could rapidly recover as occurred
during the SARS outbreak last year. Post will update production in our
PSD table when China's poultry situation is clearer.

According to a February 4, 2004, report by the Ministry of Agriculture,
since the first HPAI outbreak in January 2004, China has had 23 cases of
HPAI. Five cases have been confirmed and 18 are suspected. There were
56,417 nationwide sick birds, 49,236 dead birds and 1.215 million culled
birds, i.e. all within 3 km of any HPAI outbreak. Birds between 3-5 km
of an outbreak received compulsory vaccination and quarantine.

In response to the HPAI situation, the central and local government will
provide subsidies to farmers for killed birds. Compulsory quarantine is
free of charge. It is not clear how the government at the two levels
will share the cost. The industry indicated that the subsidies vary from
province to province from RMB10 to RMB25 (\$1.20 to \$3.00) per bird for
chicken, RMB35 per bird for geese, and something in between for ducks.

China's official cull figures (i.e., 1.2 million birds) represent only
five percent of a single day's normal slaughter rate (i.e., 22 million
birds/day or 8.3 billion birds/year). Thus, post is not forecasting a
significant HPAI impact on China's total year production levels and will
hold production constant in 2004.

At the time of writing this report, China has closed all live poultry
wet markets and also banned poultry product sales at local markets of
farm produce within 10 km around any outbreak. Transportation of live
poultry has also stopped.

If the HPAI situation continues for over three months, small
poultry-dependent farms that rely on wet market sales may go bankrupt.
Larger-scale operations will likely increase their broiler production to
meet any supplies shortages. These factors will likely slow the pace of
nationwide broiler production.

## Predominant broiler distribution at widely dispersed wet markets challenges China's efforts to modernize veterinary and food safety practices

## 

About 75 percent of broilers in China are raised on small family farms.
According to the China Poultry Association, exclusive poultry farmers
total 13 million. Thus, production is highly dispersed throughout the
country with a higher concentration in grain production areas. A large
number of small-scale farmers raise both poultry and swine. The top
three broiler producing provinces in 2003 were Shandong, Guangdong and
Jiangsu.

The Chinese Government does not require that that broiler or cattle,
like swine, be slaughtered and processed at government-approved
facilities. Chinese consumers traditionally prefer purchasing live
broilers at wet markets dispersed throughout China, the predominant
processing/distribution points for broiler products. These traditional
wet markets face a huge challenge to deal with increasingly stringent
food safety requirements being implemented by China's authorities. For
example, after HPAI started spreading in January 2004, the Government
temporarily closed slaughtering and processing at wet markets in urban
areas and rural areas within 10 km of any HPAI outbreaks.

China's poultry egg production for 2004 is forecast to increase three
percent from 25.3 MMT in 2003 to 26.1 MT due to strong consumer demand.
Thus far, the HPAI situation has not affected poultry egg production or
consumption.

According to the National Statistics Bureau, China's per capita poultry
consumption growth from January to November 2003 remained flat due to
the SARS outbreak. Given the HPAI outbreak in China this year, per
capita broiler consumption for 2004 will not likely increase but it is
too early to tell.

# Trade

## During 2004, China's total poultry imports forecast to fall 25 percent from post's previous estimate due to avian influenza and continued import restrictions

China's broiler imports are expected to decrease from post's original
September 2003 forecast of 400,000 MT to 300,000 MT due to the poultry
product import ban on countries that have cases of avian influenza such
as Thailand and the United States. The United States is the largest
broiler supplier for China, accounting for over 90 percent of China's
total broiler imports.

However, Brazilian poultry products, re-exported to China from Hong
Kong, have gradually reduced US export share. Brazil provides the same
poultry products, but lower labor costs in Brazil translate to a more
competitive price for export. Until the markets for the United States
and Thailand re-open, China will likely try to shift its import source
to Brazil.

As evidence of this trend, the Chinese import data indicates that the US
market share is increasing slightly from 2002 to 2003, but Hong Kong's
re-export data indicates that Brazil's market share is on the rise. One
possible explanation, according to the trade, is that Brazilian products
are increasingly re-packed and enter China under a US health
certificate.

**Import tariffs for broiler products reduced about 20 percent in 2004**

In accordance with China accession to the WTO, on January 1, 2004, the
country reduced the tariff for broiler products 20 percent, on average.
However, some traders do not believe they can benefit from the tariff
reduction because China's tariffs for broiler products are based on
weight. The Customs authorities use fixed prices for customs declaration
in order to avoid under invoicing, but traders complain the authorities
fix abnormally high tariff prices regardless of the prices actually paid
by the trade. This reported Customs authorities' practice of raising the
fixed price of poultry to possibly compensate for reduced duty levels
appears to be WTO-inconsistent.

USDA's FSIS will start using new certificates, effective March 1, 2004,
requested by AQSIQ as a measure to help crack down on counterfeit
certificates used to smuggle products into China. The new certificate,
coupled will the above tariff reductions, will possibly lead to more
direct shipments into Mainland China.

# Exports

China's boiler exports for 2004 are forecast to decrease about 20
percent to 311,000 MT. According to media reports, Japan, South Korea,
Hong Kong and Macao may agree to re-open part of their market, but only
for fully cooked broiler products from disease free-areas. Processed
broiler products only account for 40 percent of China's total broiler
exports.

At the moment, the four top broiler exporters in Guangdong, Jilin,
Shandong and Beijing are suffering the greatest losses from the ban on
Chinese poultry products. As a result, these companies will likely
channel their broiler products originally destined for export markets
into the domestic market.

AQSIQ has stopped issuing export quarantine certificate for any
exporting companies from provinces affected by HPAI. This means that at
least one-third of China's provinces cannot export poultry products.

According to media reports, Russia will regionalize broiler products
from China after the HPAI outbreak is under control.

## PSD Table

  --------------------- ------------ ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                  

  **Country**           **China,                                                 
                        Peoples                                                  
                        Republic                                                 
                        of**                                                     

  **Commodity**         **Poultry,                                    (1000      
                        Meat,                                         MT)(MIL    
                        Broiler**                                     HEAD)      

                        2002         Revised    2003       Estimate   2004       Forecast

                        USDA         Post       USDA       Post       USDA       Post
                        Official     Estimate   Official   Estimate   Official   Estimate
                        \[Old\]      \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year Begin**              01/2002               01/2003               01/2004

  Inventory (Reference) 0            0          0          0          0          0

  Slaughter (Reference) 287          560        0          580        0          600

  Beginning Stocks      0            0          0          0          0          0

  Production            9558         9558       9844       10000      10129      10000

  Whole, Imports        0            0          0          0          0          0

  Parts, Imports        435          331        415        329        400        297

  Intra EC Imports      0            0          0          0          0          0

  Other Imports         0            0          0          0          0          0

  TOTAL Imports         435          331        415        329        400        297

  TOTAL SUPPLY          9993         9889       10259      10329      10529      10297

  Whole, Exports        0            0          0          0          0          0

  Parts, Exports        438          438        420        388        440        311

  Intra EC Exports      0            0          0          0          0          0

  Other Exports         0            0          0          0          0          0

  TOTAL Exports         438          438        420        388        440        311

  Human Consumption     9555         9451       9839       9941       10089      9986

  Other Use, Losses     0            0          0          0          0          0

  Total Dom.            9555         9451       9839       9941       10089      9986
  Consumption                                                                    

  TOTAL Use             9993         9889       10259      10329      10529      10297

  Ending Stocks         0            0          0          0          0          0

  TOTAL DISTRIBUTION    9993         9889       10259      10329      10529      10297

  Calendar Yr. Imp.     510          167        0          222        0          215
  from U.S.                                                                      
  --------------------- ------------ ---------- ---------- ---------- ---------- ----------

## Tariff Table

  ----------- ----------------------- ------- ------ ------ ------- ---------
  China\'s                                                          
  M.F.N.                                                            
  Tariff Rate                                                       
  of Chicken                                                        
  Products,                                                         
  2001 - 2004                                                       
  (Based on                                                         
  Weight)                                                           
  (Unit:                                                            
  RMB/KG)                                                           

                                                                    \% Change

                                                                    2004/03

  HS Codes                            2001    2002   2003   2004    0.00%

  2007.1200   frozen whole broiler    1.6     1.6    1.3    1.3     -25.00%

  2007.1411   frozen broiler cuts     1.2     1      0.8    0.6     -16.67%
              with bones                                            

  0207.1419   frozen broiler cuts,    2.7     1.5    1.2    1       -10.00%
              boneless                                              

  0207.1421   frozen broiler wings    2.3     1.2    1      0.9     -16.67%

  0207.1429   frozen wingtips, paws,  1       0.8    0.6    0.5     0.00%
              liver                                                 

  0504.0021   broiler gizzard         1.7     1.7    1.4    1.4     0.00%

  Source:                                                           
  China                                                             
  Customs                                                           
  ----------- ----------------------- ------- ------ ------ ------- ---------

End of Report