The end of winter and the start of the egg-laying season coincide – which helps to explain why eggs are integral to ancient celebrations as diverse as Easter, the Passover or Nowruz (or the Persian New Year), which all begin in the spring. Scientists have since discovered that the reproductive cycle of hens is directly linked to daylight. Left to their own rhythms, hens would slow down or stop laying eggs altogether in the winter, says the New York Times.
But Cargill, a major US agricultural conglomerate, is hoping for a year-round year dividend from its own chicken business in China. After spending $300 million to build its own chicken farms in 2009, Cargill started processing chicken meat in China last year too. And the company says that demand for its poultry is so high that it is struggling to keep up with the market. Christopher Langholz, the company’s China head, told Global Entrepreneur that he regrets not leasing more space in Chuzhou, a city in Anhui province, one of Cargill’s main locations.
While pork remains China’s favourite choice of protein – accounting for nearly two-thirds of meat sales – poultry sales have grown rapidly to 20% of the market. One reason is that chicken is less expensive. But more health-conscious consumers increasingly prefer it to pork and China overtook the US as the world’s largest consumer last year.
The chicken farming industry is fragmented, with the majority of domestic farms selling just a few hundred birds at a time. But foreign interest in the market is growing. Illinois-based OSI Group, a supplier to McDonald’s, has expanded the poultry farms that it operates in China via a joint venture. Cargill’s main rival Tyson has been investing more too. “We just can’t build the [chicken] houses fast enough, and we’re going absolutely as fast as we know how to go,” Tyson’s CEO Donnie Smith told the Wall Street Journal.
Instead of buying chickens from other suppliers – a common move in other markets – Cargill has decided to raise its own birds. According to Langholz, it determined that it needed to take over production because Chinese poultry farms are not reliable enough. By Cargill’s estimates, as of 2012, only 5% of China’s chicken operations were vertically integrated, meaning that the majority of chicken processors purchase their meat from other breeders. And while operating farms raises Cargill’s costs, it also gives the company direct oversight over production and quality control.
Another hope is that improved standards will benefit the industry at large. “If all breeding farms have a sufficient degree of modernisation, the risk of avian flu will be greatly reduced,” Langholz says.
Similar sentiment may explain some of the enthusiasm for Huisheng’s IPO. The company, a domestic producer that sells its pork under the label “Safe Meat”, launched its IPO in Hong Kong early this month. Demand was so strong that the retail tranche was oversubscribed 20 times. The Hunan-based operator said that funds from the offering will be used for freezer facilities and new farms, a move that analysts say will help Huisheng keep tighter control of its own supplies and avert food scares too.
“Investors like the concept of vertically integrated producers, which they think can ensure food safety, a top concern in China right now,” analyst Pan Chenjun told Reuters. “Without vertical integration, producers need to outsource from many suppliers including small farmers, and this gap in the supply chain means food safety issues can occur.”
Since it listed on March 3, the Hong Kong and Chinese stock markets have faced a pretty torrid time. That may partly explain why the company’s stock was this week trading 16% below its IPO price.
However, the less than stellar trading performance of the meat company does not necessarily bode well for the forthcoming – and considerably larger – public offering for WH (previously known as Shuanghui), which acquired US-based food processor Smithfield Foods last year. Shuanghui said at the time of the deal that one of the main reasons for the takeover was to acquire new technology and food safety expertise from the US firm.
WH is expected to raise as much as $6 billion from its IPO.
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