Thursday, February 28, 2013

Chicken Pharming With Chinese Characteristics

Following the scandal over excessive use of pharmaceuticals in chicken-raising there is a lot of introspection in China's chicken industry. One of the items up for consideration is the "company + base + farmer" industry chain model which has been the foundation for China's "agricultural industrializtion." The poultry industry is the leading proponent of this model in which a company relies on thousands of small-scale farmers in a "production base" to supply chickens. The company supplies farmers with chicks, feed, pharmaceuticals, and tells them what to do. The company promises to buy the full-grown chickens at a reasonable price. This model is said to be in accord with "Chinese characteristics" since it incorporates large numbers of small-scale farmers, increases their income and involves them in modern agricultural supply chains. A "win-win."

One article questioned the high risk associated with the "company + farmer" model. A manager associated with one of China's leading agribusiness companies quoted in the article said the melamine, clenbuterol, and chicken-drug incidents demonstrate that the model is not feasible.

Kentucky Fried Chicken has over 4000 outlets in China that need to be supplied with chicken. It contracts with other companies to supply the chicken. KFC has no way of controlling or supervising the production and slaughter of chickens. It has to trust the supplier company to supervise production of chickens by tens of thousands of farmers. Suppliers can display animal quarantine certificates but news media investigations have shown that these certificates can easily be bought. KFC has to rely on testing of the chicken delivered to it in order to verify that standards were maintained in the production and processing. With tens of thousands of producers, each using his/her own methods and dozens of substances to test for, it would be easy for batches of bad chicken to slip through the sample testing.

In earlier decades, China's "special feature" was vast numbers of poor farmers, but today the Chinese countryside's special feature is scarce land, labor, and feed and soaring costs. The article points out that cost pressures squeezed farmers' profit margins which put more pressure on them to cut corners. Chicken farmers get a fixed price based on a 6-to-7-percent premium over production costs. With costs of feed, labor and land rising rapidly, profit margins are squeezed. Cost-cutting can harm the health of chickens, which farmers can address by using more pharmaceuticals to keep them alive.

One of the constraints on chicken farming is lack of space. Chickens are more vulnerable to disease when they are in crowded conditions. According to a farmer raising chickens for a Shanxi company, their guidelines call for 5000 birds per house. With such a high concentration, chickens are more likely to get sick, so farmers use illegal drugs or ignore the requirement that they stop administering drugs 7 days before slaughter in order to prevent high mortality.

The alternative to the "company + farmer" model is for companies to raise the birds themselves and have complete control over the process. The head of Yum! Brands China operations indicated that the company is trying to bring big companies into China to raise chickens. However, companies would have to acquire large tracts of land to build their farms. This is difficult to arrange since it means occupying the land of one or more entire villages and probably displacing grain production. (Pig farms are often confined to hillsides or forest land.) If it can be accomplished, the cost of land is high and large fixed investment and compliance with all kinds of environmental and other regulations are required. The treatment of waste is much higher when birds are highly concentrated in one place. The company would have to pay laborers and find skilled managers willing to run a farm in a remote area. One of the reasons for using the "company + farmer" model is that farmers supply the land and labor, reducing costs substantially. Moreover, the presumed lower risk of a fully integrated model assumes that the managers of company-operated farms can be trusted to follow regulations and standards.

Most Chinese people ate very little meat until chicken and pork production started to take off in the 1990s. And there was a reason for that...producing livestock requires lots of land to produce feed and forage and spread the waste. The country temporarily got massive amounts of meat by putting pigs and birds in backyards but that era is over now. China still doesn't have enough land. Costs are soaring, food safety is a national nightmare and the chickens are coming home to roost.

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