Voluntary Report - public distribution

**Date:** 12/15/2006

**GAIN Report Number:** CH6117

CH6117

**China, Peoples Republic of**

**Poultry and Products**

**Challenges to Increasing U.S. Sales of Chicken Paws to China**

**2006**

**Approved by:**

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

U.S. Embassy

**Prepared by:**

Casey Bean and Suzanne Ryan

**Report Highlights:**

Although the U.S. is still the largest chicken paw supplier to China and
total U.S. poultry product sales will exceed \$200 million in 2006, many
challenges threaten this position, including competition from Brazil and
Argentina, stricter inspections at China\'s ports, FSIS\'s inspection
mandate, and the cost of new \"China\" production lines at U.S. plants.
Further, as more and more product moves through the Mainland ports and
away from Hong Kong, U.S. product will be more carefully inspected to
ensure China's import requirements are met. According to the trade,
increasing U.S. market share hinges on addressing these challenges, in
addition to improving U.S. paw quality.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[Executive Summary 3](#executive-summary)

[China's Domestic Paw Production 3](#chinas-domestic-paw-production)

[China imports over 300,000 MT of paws each year due to limited domestic
supplies
3](#china-imports-over-300000-mt-of-paws-each-year-due-to-limited-domestic-supplies)

[Consumption Trends 4](#consumption-trends)

[Consumer preferences depend upon geographic location
4](#consumer-preferences-depend-upon-geographic-location)

[Trade 4](#trade)

[Paws account for over half of China's total poultry imports
4](#paws-account-for-over-half-of-chinas-total-poultry-imports)

[Wholesale price of paws has increased during past two years
7](#wholesale-price-of-paws-has-increased-during-past-two-years)

[U.S. faces fierce market competition from Brazil and Argentina
7](#u.s.-faces-fierce-market-competition-from-brazil-and-argentina)

[Elimination of "Hong Kong Standard" caused severe shortage of paws
8](#elimination-of-hong-kong-standard-caused-severe-shortage-of-paws)

[Processors risk financial losses due to China's "zero" tolerance for
pathogens
9](#processors-risk-financial-losses-due-to-chinas-zero-tolerance-for-pathogens)

[Policy changes, still reported as "internal" by the poultry trade, may
impact imports
10](#policy-changes-still-reported-as-internal-by-the-poultry-trade-may-impact-imports)

[Pre-Inspection law and other measures "encourage" direct shipments to
China
10](#pre-inspection-law-and-other-measures-encourage-direct-shipments-to-china)

[Volume of U.S. paws imported through official channels increasing; less
so for other suppliers
11](#volume-of-u.s.-paws-imported-through-official-channels-increasing-less-so-for-other-suppliers)

[Changes in import permit poses barrier to traders
11](#changes-in-import-permit-poses-barrier-to-traders)

[Marketing 12](#marketing)

[U.S. market share affected by competitor focus on product quality and
packaging
12](#u.s.-market-share-affected-by-competitor-focus-on-product-quality-and-packaging)

[Traders look for high-quality paws which meet their specific
requirements
13](#traders-look-for-high-quality-paws-which-meet-their-specific-requirements)

[Implementation of grading system by competitors
13](#implementation-of-grading-system-by-competitors)

[Market Outlook 13](#market-outlook)

[Outlook and opportunities to expand U.S. paw sales in China
14](#outlook-and-opportunities-to-expand-u.s.-paw-sales-in-china)

# Executive Summary

Although the U.S. is still the largest chicken paw supplier to China and
total U.S. poultry product sales will exceed \$200 million in 2006, many
challenges threaten this position, including competition from Brazil and
Argentina, stricter inspections at China\'s ports, FSIS\'s inspection
mandate, and the cost of new \"China\" production lines at U.S. plants.
Further, as more and more product moves through the Mainland ports and
away from Hong Kong, U.S. product will be more carefully inspected to
ensure China's import requirements are met. According to the trade,
increasing U.S. market share hinges on addressing these challenges, in
addition to improving U.S. paw quality.

In 2004, China banned U.S. poultry due to highly pathogenic avian
influenza (HPAI). During this time Brazil's poultry exports to China
increased over 600 percent and Argentina's poultry exports increased
over 900 percent. Brazil and Argentina shipments continue to limit the
recovery of U.S. poultry product trade due to competitive prices and
quality advantages. The resulting supply shortfall and reduced sale of
U.S. paws for sale to China is estimated to have cost the U.S. poultry
industry more than \$400 million in revenue.

According to the trade in China, increasing U.S. market share depends on
improving paw quality, continued investment in U.S. plant modifications,
and revisions to the FSIS inspection mandate.

# China's Domestic Paw Production

## China imports over 300,000 MT of paws each year due to limited domestic supplies

China's domestic broiler production is centered in the northeast and
central provinces of China (Shandong and Henan). Domestic processors
cite production costs, demand and lack of profitability as reasons to
produce chicken feet rather than chicken paws (feet are longer than
paws). The northern provinces, with concentrated broiler production,
tend to produce chicken feet, while the southern provinces (Fujian,
Guangdong, Zhejiang and Shanghai), with less concentrated broiler
production, tend to produce chicken paws.

The majority of the domestically produced paws are exported to Japan or
Korea where processors get higher prices. Due to small domestic supply,
China is forced to import approximately 300,000 to 350,000 MT of chicken
feet and paws annually. Currently, the supply of domestic paws is at
less than 40 percent of the U.S. volume shipped to China. The Trade
reports wholesale prices are \$60 to \$100/MT higher than U.S. products
for the same grade. The wholesale price for imported chicken paws is
\$1,500 to \$1,600/MT.

![](media/image2.jpeg){width="2.8333333333333335in" height="2.55in"}The
picture below illustrates the difference between a chicken paw (left)
and a chicken foot (right).

# Consumption Trends

## 

## Consumer preferences depend upon geographic location

The peak season for chicken paws is the warmer months from April to
October. During cold winter weather, the paw market generally weakens
and prices continue to drop until warmer weather.

Imported chicken paws are primarily destined for central and southeast
coastal regions of China (Guangdong, Fujian, Zhejiang, Sichuan and
Jiangsu Provinces). Most paws are sold in the wholesale markets and
distributed to restaurants. Some paws are further processed before being
moved to the wholesale market. Each market accepts its own size of
chicken paws, depending on the consumption habits and living standards
of the consumers. Suzhou, Kunming and Guangzhou markets prefer
larger-sized chicken paws, while Chongqing, Chengdu and Anhui markets
prefer small to medium-sized chicken paws.

The market for chicken feet is more varied than that of chicken paws.
Chicken feet vary widely in size, and they are sold to different
marketing channels. Bigger feet are sold to wholesale and retail markets
(for family consumption and retail in barbecue stores), while smaller
feet are typically further cooked in processing plants. Northeast and
northwest Chinese consumers tend to favor chicken feet over chicken
paws.

+-----------------+-----------------+-----------------+-----------------+
| Chicken Paw     |                 |                 |                 |
| Imports, by     |                 |                 |                 |
| province        |                 |                 |                 |
| 2005-2006       |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 | Ja              |                 | Ja              |
|                 | nuary-September |                 | nuary-September |
+-----------------+-----------------+-----------------+-----------------+
|                 | Quantity, MT    |                 | Percent Change  |
+-----------------+-----------------+-----------------+-----------------+
|                 | 2005            | 2006            | 2006/05         |
+-----------------+-----------------+-----------------+-----------------+
| All Provinces   | 129,060.57      | 204,684.50      | 58.60           |
+-----------------+-----------------+-----------------+-----------------+
| Guangzhou       | 27,559.30       | 86,850.49       | 215.14          |
+-----------------+-----------------+-----------------+-----------------+
| Shenzhen        | 19,432.76       | 62,370.51       | 220.96          |
+-----------------+-----------------+-----------------+-----------------+
| Shanghai        | 51,830.25       | 30,415.68       | -41.32          |
+-----------------+-----------------+-----------------+-----------------+
| Huangpu         | 4,948.81        | 8,580.88        | 73.39           |
+-----------------+-----------------+-----------------+-----------------+
| Nanjing         | 5,925.19        | 7,884.86        | 33.07           |
+-----------------+-----------------+-----------------+-----------------+
| Qingdao         | 4,733.38        | 3,112.21        | -34.25          |
+-----------------+-----------------+-----------------+-----------------+
| Dalian          | 4,659.14        | 3,010.02        | -35.40          |
+-----------------+-----------------+-----------------+-----------------+
| Fuzhou          | 1,339.68        | 2,248.32        | 67.83           |
+-----------------+-----------------+-----------------+-----------------+
| Gongbei         | 2,031.02        | 184.54          | -90.91          |
+-----------------+-----------------+-----------------+-----------------+
| Shanton         | 6,355.48        | 27.00           | -99.58          |
+-----------------+-----------------+-----------------+-----------------+
| Tianjin         | 123.07          | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
| Xiamen          | 122.50          | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
| HS code:        |                 |                 |                 |
| 020714.22       |                 |                 |                 |
|                 |                 |                 |                 |
| Source: WTA     |                 |                 |                 |
| China Customs   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

# 

# Trade

## Paws account for over half of China's total poultry imports 

Despite domestic production increases, China's chicken paw supplies lag
consumer demand. Chicken paw imports account for approximately half of
China's total poultry imports. In the first half of 2005, chicken paw
imports accounted for 46 and 62 percent respectively of China's total
poultry imports directly and indirectly through Hong Kong. This pattern
will likely continue into the future as long as the supply and demand
gap exists.

## 

During the first half of 2006, tttthe volume of chicken paws exported to
China and Hong Kong was 74,954 MT, with U.S. product comprising 80
percent import market share. In 2005, the U.S. exported 137,202 MT of
chicken paws accounting for 65 percent of total poultry products
exported to China. Fierce competition from Brazil and Argentina, as well
as domestic product in China has caused the U.S. market share to
decrease over time. Although Brazil and Argentina reduced the U.S.
market share from 96 percent in 2003 to only 46 percent in 2005, in
2006, the U.S. still remains the top supplier of imported poultry
products.

+-----------------+-----------------+-----------------+-----------------+
| China Chicken   |                 |                 |                 |
| Paw Imports, by |                 |                 |                 |
| country         |                 |                 |                 |
| 2005-2006       |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 | Ja              |                 | Ja              |
|                 | nuary-September |                 | nuary-September |
+-----------------+-----------------+-----------------+-----------------+
|                 | Quantity, MT    |                 | Percent Change  |
+-----------------+-----------------+-----------------+-----------------+
|                 | 2005            | 2006            | 2006/05         |
+-----------------+-----------------+-----------------+-----------------+
| World           | 129,060.57      | 204,684.50      | 58.60           |
+-----------------+-----------------+-----------------+-----------------+
| United States   | 67,175.10       | 112,963.92      | 68.16           |
+-----------------+-----------------+-----------------+-----------------+
| Brazil          | 44,016.57       | 67,210.13       | 52.69           |
+-----------------+-----------------+-----------------+-----------------+
| Argentina       | 17,334.72       | 18,094.52       | 4.38            |
+-----------------+-----------------+-----------------+-----------------+
| Chile           | 487.21          | 6,415.93        | 1216.88         |
+-----------------+-----------------+-----------------+-----------------+
| Thailand        | 22.98           | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
| Canada          | 24.00           | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
|                 |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 | Ja              |                 | Ja              |
|                 | nuary-September |                 | nuary-September |
+-----------------+-----------------+-----------------+-----------------+
|                 | Value, Millions |                 | Percent Change  |
|                 | of U.S. Dollars |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 | 2005            | 2006            | 2006/05         |
+-----------------+-----------------+-----------------+-----------------+
| World           | 129,060,570     | 204,684,496     | 58.60           |
+-----------------+-----------------+-----------------+-----------------+
| United States   | 67,175,097      | 112,963,917     | 68.16           |
+-----------------+-----------------+-----------------+-----------------+
| Brazil          | 44,016,568      | 67,210,129      | 52.69           |
+-----------------+-----------------+-----------------+-----------------+
| Argentina       | 17,334,720      | 18,094,524      | 4.38            |
+-----------------+-----------------+-----------------+-----------------+
| Chile           | 487,205         | 6,415,926       | 1216.88         |
+-----------------+-----------------+-----------------+-----------------+
| Thailand        | 22,980          | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
| Canada          | 24,000          | 0               | -100.00         |
+-----------------+-----------------+-----------------+-----------------+
| HS Code:        |                 |                 |                 |
| 020714.22       |                 |                 |                 |
|                 |                 |                 |                 |
| Source: WTA     |                 |                 |                 |
| China Customs   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

<table>
<colgroup>
<col style="width: 12%" />
<col style="width: 10%" />
<col style="width: 10%" />
<col style="width: 10%" />
<col style="width: 10%" />
<col style="width: 10%" />
<col style="width: 0%" />
<col style="width: 11%" />
<col style="width: 10%" />
<col style="width: 10%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="10">U.S. Chicken Paw Exports</td>
</tr>
<tr class="even">
<td></td>
<td colspan="6">January-December</td>
<td colspan="3">January-December</td>
</tr>
<tr class="odd">
<td></td>
<td colspan="6">Value, in 1000 U.S. Dollars</td>
<td colspan="3">Value Comparisons</td>
</tr>
<tr class="even">
<td></td>
<td>2001</td>
<td>2002</td>
<td>2003</td>
<td>2004</td>
<td colspan="2">2005</td>
<td>2005</td>
<td>2006</td>
<td>Percent Change</td>
</tr>
<tr class="odd">
<td>China</td>
<td>9,163</td>
<td>6,051</td>
<td>29,501</td>
<td>4,414</td>
<td colspan="2">55,144</td>
<td>35,677</td>
<td>87,105</td>
<td>144.15</td>
</tr>
<tr class="even">
<td>Hong Kong</td>
<td>126,312</td>
<td>76,962</td>
<td>97,958</td>
<td>65,379</td>
<td colspan="2">48,826</td>
<td>38,463</td>
<td>20,924</td>
<td>-45.60</td>
</tr>
<tr class="odd">
<td>Russian Federation</td>
<td>75</td>
<td>46</td>
<td>2,536</td>
<td>4,135</td>
<td colspan="2">12,003</td>
<td>8,523</td>
<td>10,320</td>
<td>21.08</td>
</tr>
<tr class="even">
<td>Singapore</td>
<td>138</td>
<td>125</td>
<td>3,760</td>
<td>3,058</td>
<td colspan="2">5,298</td>
<td>4,164</td>
<td>2,961</td>
<td>-28.89</td>
</tr>
<tr class="odd">
<td>World</td>
<td>137,876</td>
<td>84,369</td>
<td>149,771</td>
<td>95,074</td>
<td colspan="2">135,714</td>
<td>100,213</td>
<td>127,200</td>
<td>26.93</td>
</tr>
<tr class="even">
<td colspan="10"></td>
</tr>
<tr class="odd">
<td></td>
<td colspan="5">January-December</td>
<td colspan="4">January-December</td>
</tr>
<tr class="even">
<td></td>
<td colspan="5">Quantity, MT</td>
<td colspan="4">Quantity Comparisons</td>
</tr>
<tr class="odd">
<td></td>
<td>2001</td>
<td>2002</td>
<td>2003</td>
<td>2004</td>
<td>2005</td>
<td colspan="2">2005</td>
<td>2006</td>
<td>Percent Change</td>
</tr>
<tr class="even">
<td>China</td>
<td>18,154.7</td>
<td>13,380.9</td>
<td>46,281.0</td>
<td>6,460.0</td>
<td>64,006.0</td>
<td colspan="2">42,600.1</td>
<td>99,082.5</td>
<td>132.59</td>
</tr>
<tr class="odd">
<td>Hong Kong</td>
<td>261,286.2</td>
<td>144,319.5</td>
<td>155,409.7</td>
<td>101,964.3</td>
<td>65,450.2</td>
<td colspan="2">55,589.8</td>
<td>23,354.7</td>
<td>-57.99</td>
</tr>
<tr class="even">
<td>Russian Federation</td>
<td>188.7</td>
<td>99.8</td>
<td>3,679.0</td>
<td>6,455.3</td>
<td>15,728.4</td>
<td colspan="2">11,453.6</td>
<td>12,518.1</td>
<td>9.29</td>
</tr>
<tr class="odd">
<td>Singapore</td>
<td>328.0</td>
<td>221.0</td>
<td>4,965.6</td>
<td>3,253.0</td>
<td>4,889.8</td>
<td colspan="2">3,975.8</td>
<td>3,642.4</td>
<td>-8.39</td>
</tr>
<tr class="even">
<td>World</td>
<td>282,560.2</td>
<td>161,974.2</td>
<td>240,549.2</td>
<td>147,046.7</td>
<td>170,422.6</td>
<td colspan="2">132,719.1</td>
<td>146,988.4</td>
<td>10.75</td>
</tr>
<tr class="odd">
<td colspan="10"><p>Source: Department of Commerce, U.S. Census Bureau,
Foreign Trade Statistics</p>
<p>HS code: 0207140045</p></td>
</tr>
</tbody>
</table>

![](media/image3.wmf)

## Wholesale price of paws has increased during past two years

The wholesale price of chicken paws has increased remarkably during the
last two years. Jumbo-sized chicken paws reached \$1,900 to \$2,275/MT
in the main markets with an average price of \$1,500 to \$1,600/MT. The
trade believes the increase in wholesale price is primarily due to short
supply from the U.S. and the increasingly strict quarantine inspection
at China's ports. According to feedback from importers at major
wholesale markets, demand for chicken paws is relatively lower than it
was in August 2006 as the weather started to cool down across China. The
trade saw prices drop by 3 to 5 percent or roughly \$60 to \$75/MT
compared to a couple of months earlier.

+-----------------+-----------------+-----------------+-----------------+
| Chicken Paw     |                 |                 |                 |
| Prices in       |                 |                 |                 |
| China, by       |                 |                 |                 |
| country         |                 |                 |                 |
| 2005-2006 (U.S. |                 |                 |                 |
| Dollars)        |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
|                 | Ja              | Ja              | Ja              |
|                 | nuary-September | nuary-September | nuary-September |
+-----------------+-----------------+-----------------+-----------------+
|                 | \$/KG           | \$/KG           | Percent Change  |
+-----------------+-----------------+-----------------+-----------------+
|                 | 2005            | 2006            | 2006/05         |
+-----------------+-----------------+-----------------+-----------------+
| World           | 0.84            | 0.86            | 2.38            |
+-----------------+-----------------+-----------------+-----------------+
| United States   | 0.87            | 0.88            | 1.15            |
+-----------------+-----------------+-----------------+-----------------+
| Brazil          | 0.83            | 0.81            | -2.41           |
+-----------------+-----------------+-----------------+-----------------+
| Argentina       | 0.77            | 0.89            | 15.58           |
+-----------------+-----------------+-----------------+-----------------+
| Chile           | 0.80            | 0.80            | 0.00            |
+-----------------+-----------------+-----------------+-----------------+
| Thailand        | 0.51            | N/A             | N/A             |
+-----------------+-----------------+-----------------+-----------------+
| Canada          | 0.80            | N/A             | N/A             |
+-----------------+-----------------+-----------------+-----------------+
| HS Code:        |                 |                 |                 |
| 020714.22       |                 |                 |                 |
|                 |                 |                 |                 |
| Source: WTA     |                 |                 |                 |
| China Customs   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

## U.S. faces fierce market competition from Brazil and Argentina 

Despite increased wholesale and retail prices, paw demand has remained
nearly level. Many U.S. plants are still not able to meet FSIS
inspection requirements for paws because an entire run of paws must be
destroyed if one chicken carcass does not pass inspection (see the next
section). As a result, the supply of paws available for export has
fallen. The reduced volume and increased wholesale prices has encouraged
traders to seek sources other than the U.S.

Brazil is the primary competitor for big and medium-sized paws, while
Argentina supplies China small-sized paws. Paws from Brazil make up
about 70 percent of the Suzhou market, one of the most important paw
markets in China. According to the trade, the quality and packaging of
Brazil paws is better than that used for U.S. product, and the Brazilian
suppliers are more custom-oriented. Argentina's paw sales to China are
rapidly expanding and offer a price advantage over U.S. paws. On
average, Argentine paws are \$ 0.04/lb cheaper than U.S. paws.

The following picture shows a Brazilian paw (left) and a U.S. paw
(right).

![](media/image4.jpeg){width="3.5in" height="3.397222222222222in"}

According to the trade, the demand for paws in China is so strong that
even non-traditional suppliers are entering the market like Chile, the
EU, Peru, Iran and Turkey. Chile currently ships about 40 containers a
month, and its market share is growing. The EU is a limited supplier and
ships very little product to China, though the industry there exports
more feet than paws due to profitability. Iran has stepped-up supplies
of chicken paws, now shipping around 50 to 80 loads a month to China.
Turkey ships about 100 containers a month to China.

## Elimination of "Hong Kong Standard" caused severe shortage of paws

Since 2005, the elimination of the "Hong Kong Standard" for chicken paws
has reduced the supply of U.S. chicken paws for the China market.
Effective April 30, 2005, China unified the chicken paw standard for
Hong Kong and the Mainland as an "edible product". Previously, chicken
paws exported to Hong Kong could be certified as "not fit for human
consumption".

As the result of the new standard, the U.S. Department of Agriculture's
(USDA) Food Safety and Inspection Service (FSIS) must certify ante
mortem and postmortem inspection. The trade indicates this new
requirement is impacting the volume and price of U.S. chicken paw
exports to China because some U.S. plants have decided the investment to
change production lines is too costly, coupled with the perception that
China's regulatory uncertainty introduces too much supplier risk.

Until last year, chicken feet and paws were not inspected by USDA and
were plant-graded. Now, FSIS inspectors must "associate" the feet with
carcasses in order to make sure they are not from diseased or
condemnable birds. Feet, however, are separated from the carcass before
arriving at inspection stations. As a result, a batch inspection system
was implemented, which associated a batch of feet or paws with a group
or lot of carcasses processed within a certain period of time. The
problem with this system is if one carcass within the lot is condemned,
the entire batch of feet and paws are also condemned. The traders inform
FAS Beijing that processors need to slaughter 400,000 or more broilers
in order to make one container of chicken paws. These requirements have
kept limits on the U.S. supply of paws.

FSIS's inspection standards for chicken paws, in addition to disparity
in the application of defect classification on the part of local USDA
inspection personnel, has led many U.S. producers to decrease or even
shut down their paw production. Processors have chosen this route
because of the high cost associated with modifying their equipment in
order to produce USDA FSIS inspected paws. Some processors also cite
their lack of confidence in a smooth trading environment as a reason to
suspend their paw production. After several millions of dollars in
investments, some plants are beginning to resume production, however,
the output is far from reaching previous levels.

As an example, one U.S. producer used to ship more than 300 loads a
month of chicken paws to China, but after elimination of the Hong Kong
standard, they stopped packing paws in many of their plants, and now
only ship 50 loads a month. The new inspection requirements and the
production line alterations have reportedly raised costs, thus passed on
to the customer in China.

## 

## Processors risk financial losses due to China's "zero" tolerance for pathogens

On January 1, 2006, China implemented a new national standard, GB
16869-2005, for fresh and frozen poultry products (see CH6001),
replacing the GB 16869-2000 standard. The standard reinforces a "0"
tolerance for the pathogens Salmonella enteritidis and *Escherichia
coli* O157:H7 on fresh and frozen poultry products. The following chart
is a translation of the microbial requirements. Under Salmonella and
O157:H7, "0/25g" means no pathogens detected in five, 25-gram samples.

+-----------------------+-----------------------+-----------------------+
| Microbial Test        |                       |                       |
| Requirements          |                       |                       |
+-----------------------+-----------------------+-----------------------+
| Item                  | Index                 |                       |
+-----------------------+-----------------------+-----------------------+
|                       | Fresh Poultry         | Frozen Poultry        |
|                       | Products              | Products              |
+-----------------------+-----------------------+-----------------------+
| Total number of       | 1 X 10^6^             | 5 X 10^5^             |
| bacteria              |                       |                       |
+-----------------------+-----------------------+-----------------------+
| Coliform (MPN/100 g)  | 1 X 10^4^             | 5 X 10^3^             |
+-----------------------+-----------------------+-----------------------+
| ####### Salmonella    | 0/25 g^a^             | 0/25 g^a^             |
+-----------------------+-----------------------+-----------------------+
| *E. coli* O157:H7     | 0/25 g^a^             | 0/25 g^a^             |
+-----------------------+-----------------------+-----------------------+
| ^a^ 5 total samples   |                       |                       |
+-----------------------+-----------------------+-----------------------+

The "zero" tolerance standard for pathogens on raw poultry will impact
all imported products. But according to the trade, the lower moisture
tolerance will impact U.S. products more than Brazilian products,
because most U.S. plants use ice cooling during processing and U.S.
moisture tolerance is reported as higher than the Chinese tolerance.
Brazilian plants use air chilling. As a result, their poultry products
more easily meet the Chinese specifications.

"Zero" tolerance (0/25g from 5 samples) on pathogens for imported raw
poultry products is difficult for processors to meet and they risk
considerable financial losses if products fail inspection at the China
port CIQ based on this requirement. Besides China's "zero" tolerance
(0/25 g from 5 samples) on pathogens for imported raw poultry products
explained in FAS Beijing's 2006 semi-annual poultry report CH6004, U.S.
exporters should also pay attention to the following items:

  ----------------------------------- -----------------------------------
  Item                                Maximum Level

  Clopidol                            0.01 (mg/kg)

  Moisture                            6 (percent)

  Lead                                0.2 (mg/kg)

  Mercury, meat                       0.05 (mg/kg)
  ----------------------------------- -----------------------------------

China suspended export eligibility for 11 U.S. poultry plants for
pathogen and residue violations at the beginning of 2005. After a field
study by AQSIQ officials in March 2006, the suspension was lifted. As a
result of a USDA/AQSIQ Memorandum and FAS/FSIS technical talks, AQSIQ
now allows up to 45 days for corrective actions instead of delisting
plants immediately.

## Policy changes, still reported as "internal" by the poultry trade, may impact imports

AQSIQ continues to administer the issuing of Meat Import Quarantine
Permits (MIQP) for meat and poultry products. AQSIQ also told the trade
it will re-evaluate and accredit eligible meat importers and will begin
listing their names on its website on September 1, 2006
([www.aqsiq.gov.cn](http://www.aqsiq.gov.cn/)). Contacts report
officials have apparently instructed trader they must fully utilize the
previous year's MIQP in order to receive a new MIQP with an approved
import quantity exceeding the actual volume imported from the previous
year. Further, AQSIQ will only accept an application for a new IMQP for
the same type of product from the same origin after they have fulfilled
75 percent of the import quantity approved in the MIQP. AQSIQ will wait
to issue new MIQP's until the importer uses up the remaining MIQP to
trade in for a new one.

Though still unofficial, these policies could impact poultry product
imports and raise costs during 2007. Another possibility is that most
eligible importers may not be end users. Importers holding MIQP's that
have not been filled may enter into arbitrage by auctioning the MIQP to
end users at a much higher price as many of them are not eligible to
apply for their own MIQP. As a result, the additional cost may limit
imported poultry product competitiveness with the trade, ultimately
passing the higher costs to consumers.

## Pre-Inspection law and other measures "encourage" direct shipments to China

Direct shipments to China's ports have been increasing since 2000 and
are forecast to increase again in 2007 due to stricter requirements
imposed by China to eliminate smuggling from Hong Kong. As of November
1, 2004, all meat re-exported to China through Hong Kong should be
pre-inspected by the China Hong Kong Inspection Company (CIC).
Containers must be moved from the entry port to the CIC inspection place
within 2 hours to avoid repacking or re-labeling for smuggling. The
inspection cost for one container is approximately \$500. The extra cost
and burden has shifted direct trade up the Mainland coast ports, a trend
likely to continue into the future.

Imported paws are subject to a \$60/MT duty plus a 13 percent VAT (value
added tax). China's tariff reductions on poultry products have increased
trader profit margins for direct shipments, and the trade is bringing in
less volume from Hong Kong. China's inspection officials are now
clearing more U.S. poultry product in Shanghai ports than held in Hong
Kong ports. Additionally, the trade believes increased transportation
costs in Shenzhen, new import regulations and chicken feet certification
requirements have made costs of re-exporting from Hong Kong comparable
to direct shipments to China. China's pre-inspection fee alone is an
important cost factor that will continue to encourage direct shipments
to mainland China.

Effective May 2005, Hong Kong traders can be eligible consignees on bill
of lading and health certificates for China-bound shipments transshipped
through Hong Kong. Traders can import and stocks paws in Hong Kong and
later look for a mainland importer. Though this change makes Hong Kong
re-exports more convenient, the general trend favors trade shifting to
direct shipments as it becomes less and less profitable to ship through
Hong Kong. See the FSIS Export Library for more information.

## Volume of U.S. paws imported through official channels increasing; less so for other suppliers

The majority of U.S. paws are now inspected and imported at the coastal
ports of China. One Brazilian plant is currently approved to export to
China, but the volume of Brazilian product in China suggests a
significant volume comes in to China via unofficial channels. According
to the trade, Brazilian officials are trying to remedy this situation by
seeking approval for an additional 20 or more plants by the end of 2006.

+-------------+-------------+-------------+-------------+-------------+
| Hong Kong   |             |             |             |             |
| Chicken Paw |             |             |             |             |
| Imports     |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
|             | Januar      |             |             |             |
|             | y-September |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
|             | Quantity,   |             |             | Percent     |
|             | MT          |             |             | Change      |
+-------------+-------------+-------------+-------------+-------------+
|             | 2004        | 2005        | 2006        | 2006/05     |
+-------------+-------------+-------------+-------------+-------------+
| World       | 149,197.86  | 147,917.40  | 131,405.71  | -11.16      |
+-------------+-------------+-------------+-------------+-------------+
| Brazil      | 44,627.92   | 33,105.29   | 78,924.92   | 138.41      |
+-------------+-------------+-------------+-------------+-------------+
| United      | 72,231.30   | 73,927.20   | 24,240.68   | -67.21      |
| States      |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Argentina   | 2,130.14    | 5,314.97    | 11,587.35   | 118.01      |
+-------------+-------------+-------------+-------------+-------------+
| Chile       | 4,925.13    | 6,026.74    | 5,574.13    | -7.51       |
+-------------+-------------+-------------+-------------+-------------+
| Iran        | 7,153.58    | 9,932.24    | 3,252.77    | -67.25      |
+-------------+-------------+-------------+-------------+-------------+
| United      | 1,275.91    | 1,841.26    | 2,189.79    | 18.93       |
| Kingdom     |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Australia   | 1,205.16    | 979.73      | 1,335.31    | 36.29       |
+-------------+-------------+-------------+-------------+-------------+
| Japan       | 32.48       | 606.20      | 779.45      | 28.58       |
+-------------+-------------+-------------+-------------+-------------+
| Poland      | 97.20       | 91.69       | 574.20      | 526.21      |
+-------------+-------------+-------------+-------------+-------------+
| France      | 332.63      | 938.98      | 518.67      | -44.76      |
+-------------+-------------+-------------+-------------+-------------+
| Source:     |             |             |             |             |
| Hong Kong   |             |             |             |             |
| Census and  |             |             |             |             |
| Statistics  |             |             |             |             |
| Department  |             |             |             |             |
|             |             |             |             |             |
| HS code:    |             |             |             |             |
| 02021410    |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+

+-------------+-------------+-------------+-------------+-------------+
| Hong Kong   |             |             |             |             |
| Chicken Paw |             |             |             |             |
| Re-Exports  |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
|             | Januar      |             |             |             |
|             | y-September |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
|             | Quantity,   |             |             | Percent     |
|             | MT          |             |             | Change      |
+-------------+-------------+-------------+-------------+-------------+
|             | 2004        | 2005        | 2006        | 2006/05     |
+-------------+-------------+-------------+-------------+-------------+
| World       | 55,639.80   | 70,355.06   | 109,232.24  | 55.26       |
+-------------+-------------+-------------+-------------+-------------+
| China       | 46,928.47   | 48,357.32   | 86,245.83   | 78.35       |
+-------------+-------------+-------------+-------------+-------------+
| Taiwan      | 916.38      | 20,362.16   | 22,665.78   | 11.31       |
+-------------+-------------+-------------+-------------+-------------+
| Macau       | 583.61      | 439.79      | 243.11      | -44.72      |
+-------------+-------------+-------------+-------------+-------------+
| Vietnam     | 6,841.90    | 1,193.13    | 72.01       | -93.96      |
+-------------+-------------+-------------+-------------+-------------+
| Malaysia    | 0           | 0           | 5.20        | 0.00        |
+-------------+-------------+-------------+-------------+-------------+
| Indonesia   | 2.41        | 2.66        | 0.32        | -87.97      |
+-------------+-------------+-------------+-------------+-------------+
| United      | 0           | 0           | 0           | 0.00        |
| States      |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Source:     |             |             |             |             |
| Hong Kong   |             |             |             |             |
| Census and  |             |             |             |             |
| Statistics  |             |             |             |             |
| Department  |             |             |             |             |
|             |             |             |             |             |
| HS code:    |             |             |             |             |
| 02071410    |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+

## 

## Changes in import permit poses barrier to traders

Two permits are required to import chicken paws into the China market:
the Quarantine Import Permit, issued by AQSIQ, and the Automatic Import
Registration Form (ARF), issued by MOFCOM. Currently, there are around
200 MOFCOM accredited importers whom are also eligible for ARF
allocation. After the trader gets these two permits, they have the right
to take an order with foreign suppliers. When the products arrive at the
port, the China Customs imposes the taxes and CIQ checks the documents
and does the quarantine inspection. Recently, AQSIQ has implemented some
new policies with regards to Import Permit issuance, which has posed
barriers to traders. Because of the new policy, traders may only do
business with one supplier at a time and cannot buy different items
simultaneously. The volume for each import permit is set at 400 MT and
importers are now required to use 75 percent of the existing import
permit volume before they can make a new application. Importers are
allowed to make an application for a single item from one country only.
Traders have complained that these new policies have made their business
very difficult and extremely inflexible and believe these policies are
not in line with World Trade Organization (WTO) regulations.

# Marketing

## U.S. market share affected by competitor focus on product quality and packaging

Characteristics such as "yellow paws" (the outer layer of skin is not
properly removed), inflexible package sizes and excess package moisture
are reported as factors driving Chinese buyers to switch to supplier
other than the United Stats. U.S. producers first pack their paws in
small boxes, then place 5 or 6 of the boxes in containers weighing 11
pounds on average. Generally, there is a great deal of weight in the
form of excess moisture or ice. Brazilian processors hand pack paws into
smaller 2 to 4 pound containers. In addition, Brazilian poultry is air
chilled, so shipments rarely have a problem with excess moisture or ice.
Most U.S. poultry is water chilled, and in the end, the buyer pays for
the excess moisture\--a costly and unwanted expense.

U.S. chicken paws (top right) packages contain more ice compared to the
air chilled Brazilian chicken feet (left). Brazilian poultry product
(bottom left) is air chilled and packaged by hand while U.S. poultry
product (right) is water chilled and packaged by machinery. There is a
considerably greater amount of ice in U.S. poultry product as compared
to Brazilian products.

![](media/image5.jpeg){width="2.6951388888888888in"
height="2.370138888888889in"}

![](media/image7.jpeg){width="2.6034722222222224in"
height="2.578472222222222in"}

## Traders look for high-quality paws which meet their specific requirements

Domestic traders prefer the following characteristics when purchasing
paws:

*Moisture:* Moisture no greater than 8 percent, a maximum based on
China's national standard. The trade reports that U.S. paws often have
higher moisture percentage compared with Brazilian products. U.S. plants
utilize ice cooling after harvest, while Brazilian plants utilize
air-cooling.

*Size of paws:* Large cities and wealthier consumers prefer U.S.
jumbo-sized chicken paws because they contain more meat. Medium-sized
Brazilian paws, typically 25 grams each, are well accepted by
lower-income consumers.

*Packaging:* Domestic traders prefer Brazil's packing by hand in smaller
bags compared with U.S. layer packing by machinery in large bags.
Smaller bags are easier and more convenient for supermarkets to use.

*Prices:* The paw market is an extremely price-driven market; both
traders and consumers are price sensitive. Brazil and Argentine paws
have cut into the U.S. market share because of their very competitive,
lower pricing.

*Color:* Lighter color paws are preferred.

The following picture compares the larger U.S. paw packages (left) to
the smaller packages that are typical of our competition (right).

![](media/image9.jpeg){width="2.25in" height="2.171527777777778in"}

## Implementation of grading system by competitors

In 2004, China signed meat quarantine protocols with processors in
Argentina and Brazil to meet Chinese quarantine requirements. In
addition, Brazil and Thailand's certified system for grading feet and
paws offers buyers more options in how to market their product. For
example, grade "A" Brazilian feet are select product uniform in size, a
heavy meat content and has specialized packaging. Grade "B" paws have
lower quality and are smaller in size.

The lack of a grading system for U.S. chicken paws poses the question to
buyers whether U.S. paws can compete with graded Brazilian paws. Some
traders indicate that U.S. paws are sometimes packaged without any
grading and contain paws of all different sizes and quality.

# Market Outlook 

## Outlook and opportunities to expand U.S. paw sales in China

China's domestic chicken paw supplies will lag overall demand for the
foreseeable future, despite increases in domestic paw production. China
imports over 300,000 MT of chicken paws annually, accounting for over
half of China's total poultry imports. This pattern will likely continue
into the future as long as the supply and demand gap exists.

Although the U.S. is still the largest chicken paw supplier to China and
total U.S. poultry product sales will exceed \$200 million in 2006, many
challenges threaten this position, including competition from Brazil and
Argentina, stricter inspections at China\'s ports, FSIS\'s limited
inspection mandate, and the cost of new \"China\" production lines at
U.S. plants. Further, as more and more product moves through the
Mainland ports and away from Hong Kong, U.S. product will be more
carefully inspected to ensure China's import requirements are met.
According to the trade, increasing U.S. market share hinges on
addressing these challenges, in addition to improving U.S. paw quality.

The poultry trade in China indicates that U.S. chicken paws can only
increase market share against Brazil and Argentina by addressing quality
concerns. Other factors include utilizing smaller packages for paws,
reducing package moisture (especially ice), reducing product defects and
implementing a more economical paw grading system. Continued industry
investment in plant renovations in order to meet the FSIS inspection
process will also facilitate trade and assure Chinese buyers the United
States is a reliable supplier.

# 

End of report.