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Investment Report on China Beef Industry

Presented by:

Beijing Orient Agribusiness Consultants Limited

September 2008

Research Background

With beef production above 7 million tons, China is the 3rd largest beef producer in the world; but backyard farms and manual slaughter units are main players of the industry. Large cattle farms with annual cattle crop higher than 100 heads only gain a market share of 11%, modern slaughterhouses’ market share is only 13%. For beef products, Room Temperature Beef account for more than 80% of total beef production. In recent years, China breeder cow inventory kept declining due to poor earnings from breeder cow business, which will make China cattle inventory and beef production keep declining from 2008. China beef production will only recover in 2012.

In 2007, there were about 1000 cattle slaughterhouses in China with total capacity of 12 million heads per year and total beef production less than 1 million tons, which accounts for 20% of national beef cattle crop and 13% of national beef production respectively. The largest company only slaughtered 150 thousand heads in 2007.

Declining cattle inventory make public company -- Fucheng (Hebei)’s beef production fall by 18% in 2007, and other large beef companies also suffers with capacity utilization rate only 20%. Small companies will soon suspend production or exit the industry, which make integration opportunities for large companies. The largest beef company in China ? Jilin Haoyue group planned to double its capacity to 1 million heads before 2010.

Because of serious meat quality problems of illegal cattle slaughter units, we predict China government will restrict small slaughterhouses and punish illegal slaughtering; in 2007 <Interim Measures of Appointed Slaughter for Cattle, Sheep & Goat and Poultry> was issued by Hebei Provincial government and came into force from April 1st of the same year. In this Measure, qualification and quantity of cattle slaughterhouses in Hebei were confined. This was the first province-level regulation requiring cattle Appointed Slaughter; these measures all benefit large companies. By lobbying of large companies, some areas like Heilongjiang province began to give subsidy for breeder cow farmers. Although low subsidy make the support policy is not so effective, it’s still a good start toward more subsidies and we predit more areas will follow. These support policies will help recover breeder cow inventory.

In this report, BOABC comprehensively analyzes China beef consumption & Supply from 2000 to 2017. By combining value chain of beef industry and comparison with beef industry of US and Brazil, especially Brazil JBS group which became global largest beef processing company through frequent multinational acquisition, investment opportunities and investment value in China beef industry are concluded.

Table of Contents

1 Policy Environment and Outlook of China Beef Industry......................................................... 1

1.1 Grain Production Policy................................................................................................... 1

1.2 Environmental Protection Policy on Animal Farming............................................................ 2

1.3 Quality Control over Cattle Farming and Beef Cirlulation...................................................... 2

1.4 Livestock Industry Development Pilicy............................................................................... 3

1.5 Government Support Policy for Cattle Farming................................................................... 3

1.6 Feed Industry Development Policy.................................................................................... 4

1.7 Beef Cattle Slaughter Policy............................................................................................. 5

1.8 Beef Trade Policy............................................................................................................ 5

1.9 Evaluation of China Beef Industry...................................................................................... 6

2 China Beef Industry Profile.................................................................................................. 7

2.1 Current Profile................................................................................................................. 7

2.2 Beef Cattle Breeds.......................................................................................................... 7

2.3 Beef Cattle Inventory........................................................................................................ 8

2.4 Beef Consumption........................................................................................................... 9

2.5 Beef Products................................................................................................................. 10

2.6 Cattle Slaughterhouses.................................................................................................... 11

2.7 Beef Trade...................................................................................................................... 11

3 China Beef Consumption..................................................................................................... 13

3.1 Structure & Trends of Meat Consumption........................................................................... 13

3.2 Structure & Trends of Beef Consumption............................................................................ 14

3.3 Prospects of Household Beef Consumption........................................................................ 16

3.3.1 Structure & Trends of Household Food Consumption........................................................ 16

3.3.2 Influences of Income Increase........................................................................................ 18

3.3.3 Influences of Population Growth..................................................................................... 19

3.3.4 Influences of Urbanization.............................................................................................. 20

3.3.5 Prospects of Household Beef Consumption..................................................................... 21

3.4 Prospects of Outdoor Beef Consumption........................................................................... 22

3.4.1 Influences of Income Increase........................................................................................ 22

3.4.2 Influences of Population Growth..................................................................................... 24

3.4.3 Influences of Urbanization.............................................................................................. 24

3.4.4 Prospects of Outdoor Beef Consumption......................................................................... 25

3.5 Prospects of Beef Processing Industry.............................................................................. 25

3.5.1 Share of Processed Beef in Processed Meat Products..................................................... 25

3.5.2 Main Products and Output............................................................................................. 27

3.5.3 Processing Capacity..................................................................................................... 27

3.5.4 Prospects of Beef Processing Industry........................................................................... 28

3.6 Consumption of Top-grade Beef & Beef Products................................................................ 30

3.6.1 Consumption of Top-grade Beef...................................................................................... 30

3.6.2 Consumption of Top-grade Beef Products........................................................................ 30

3.6.3 Import of Top-grade Beef................................................................................................ 31

3.7 Prospects of Beef Export................................................................................................. 33

3.7.1 Main Players of Global Beef Trade.................................................................................. 33

3.7.2 Destinations of China Beef Export.................................................................................. 35

3.7.3 Main Competitors and Market Size of China Beef Export.................................................. 35

3.7.4 Impacts of Cost for China Beef Export............................................................................ 37

3.7.5 Impacts of Trade Policy for China Beef Export................................................................. 37

3.7.6 Prospects of China Beef Export..................................................................................... 37

3.8 Impacts of Substitues and Prices...................................................................................... 38

3.9 Impacts of Cattle Diseases and Other Uncertainties........................................................... 39

3.10 Prospects of Beef Consumption...................................................................................... 41

4 China Beef Supply.............................................................................................................. 42

4.1 Cattle Inventory & Crop.................................................................................................... 42

4.1.1 Breeder Cows Inventory................................................................................................. 42

4.1.2 Inventory & Crop Volume............................................................................................... 43

4.1.3 Inventory & Crop Structure............................................................................................. 45

4.1.4 Beef Cattle Crop by Farm Size....................................................................................... 47

4.2 Beef Supply by Farming & Grazing Areas.......................................................................... 48

4.2.1 Farming Areas.............................................................................................................. 48

4.2.2 Grazing Areas.............................................................................................................. 50

4.2.3 Supply Prospects of Farming & Grazing Areas................................................................ 50

4.3 Beef Supply by Beef Belts................................................................................................ 51

4.3.1 Northeast China............................................................................................................ 51

4.3.2 Central China............................................................................................................... 52

4.3.3 Northwest China........................................................................................................... 53

4.3.4 Southern China............................................................................................................. 54

4.3.5 Supply Prospects of All Beef Zones................................................................................ 54

4.4 Beef Production............................................................................................................... 55

4.4.1 Total Production and Species......................................................................................... 55

4.4.2 Production of Fresh, Chilled and Frozen Beef.................................................................. 57

4.4.3 Production of Low-end, Middle-end and High-end Beef...................................................... 58

4.5 Impacts of Feedstuff Supply............................................................................................. 59

4.6 Impacts of Beef Trade...................................................................................................... 60

4.7 Prospects of Beef Supply................................................................................................. 60

5 China Beef Demand & Supply Balance................................................................................. 61

5.1 Beef Price....................................................................................................................... 61

5.2 Possibility of Large-amount-Beef-Import............................................................................. 62

5.3 Beef Export..................................................................................................................... 62

5.4 Potencial & Real Beef Consumption.................................................................................. 63

5.4.1 Household Consumption................................................................................................ 63

5.4.2 Outdoor Consumption................................................................................................... 64

5.4.3 Beef Processing........................................................................................................... 65

5.5 Demand & Supply Balance............................................................................................... 66

6 Value Chain of China Beef Cattle Industry............................................................................. 67

6.1 Cost & Profit................................................................................................................... 67

6.1.1 Cattle Feed Production.................................................................................................. 68

6.1.2 Breeder Cow Rearing.................................................................................................... 69

6.1.3 Beef Cattle Rearing....................................................................................................... 70

6.1.3.1 Different Regions........................................................................................................ 71

6.1.3.2 Dofferent-Sized Farms................................................................................................ 71

6.1.4 Slaughtering................................................................................................................. 72

6.1.4.1 Mannual & Illegal Slaughter Units................................................................................ 72

6.1.4.2 Modern Slaughterhouses............................................................................................ 72

6.1.5 Beef Processing........................................................................................................... 73

6.2 Value Chain Structure...................................................................................................... 74

6.2.1 Production Value.......................................................................................................... 72

6.2.2 Production Profit........................................................................................................... 73

6.3 Proifit Allocation and Reasonability.................................................................................... 75

6.4 Impacts of Reasonability of Profit Allocation....................................................................... 75

7 Global Beef Cattle Rearing & Production Cost....................................................................... 76

7.1 China and It’s Share........................................................................................................ 76

7.2 Cattle Cost & Beef Price in Uinted States.......................................................................... 77

7.2.1 Per Capita Meat Consumption Structure......................................................................... 77

7.2.2 Beef Cattle Farm Size................................................................................................... 78

7.2.3 Beef Cattle Production Cost........................................................................................... 78

7.2.4 Fresh Beef Wholesale Price.......................................................................................... 79

7.3 Cattle Cost & Beef Price in Brazil..................................................................................... 79

7.3.1 Per Capita Meat Consumption Structure......................................................................... 79

7.3.2 Beef Cattle Farm Size................................................................................................... 79

7.3.3 Beef Cattle Production Cost........................................................................................... 80

7.3.4 Fresh Beef Wholesale Price.......................................................................................... 80

7.4 Cattle Cost & Beef Price in Australia................................................................................. 81

7.4.1 Per Capita Meat Consumption Structure......................................................................... 81

7.4.2 Beef Cattle Farm Size................................................................................................... 81

7.4.3 Beef Cattle Production Cost........................................................................................... 82

7.4.4 Fresh Beef Wholesale Price.......................................................................................... 83

7.5 Cattle Cost & Beef Price in Canada................................................................................... 83

7.5.1 Per Capita Meat Consumption Structure......................................................................... 83

7.5.2 Beef Cattle Farm Size................................................................................................... 84

7.5.3 Beef Cattle Production Cost........................................................................................... 84

7.5.4 Fresh Beef Wholesale Price.......................................................................................... 85

7.6 China’s Relative Cost & Price........................................................................................... 85

8 China Beef Cattle Slaughter & Processing Industry............................................................... 86

8.1 Industry Profile................................................................................................................ 86

8.1.1 Size............................................................................................................................ 86

8.1.2 Profitablity.................................................................................................................... 86

8.1.3 Enterprise.................................................................................................................... 88

8.1.4 Capacity & Layout........................................................................................................ 88

8.1.5 Technology & Products................................................................................................. 89

8.1.6 Marketing..................................................................................................................... 89

8.2 Large Companies............................................................................................................ 89

8.2.1 Live Cattle Procurement................................................................................................ 89

8.2.2 Product Fabrication....................................................................................................... 90

8.2.3 Marketing..................................................................................................................... 91

8.2.4 Competition.................................................................................................................. 92

8.3 Fucheng......................................................................................................................... 94

8.3.1 Live Cattle Procurement................................................................................................ 94

8.3.2 Product Fabrication....................................................................................................... 95

8.3.3 Marketing..................................................................................................................... 96

8.3.4 Finance Indice.............................................................................................................. 97

8.4 Beef Industry Evaluation................................................................................................... 97

8.4.1 Driving Forces.............................................................................................................. 97

8.4.2 Risks........................................................................................................................... 98

8.5 Industry Prospects.......................................................................................................... 99

9 Investments Analysis on China Cattle Slaughter & Processing Industry................................... 100

9.1 Possibility of Building Large Beef Groups........................................................................... 100

9.2 Investment Opportunities.................................................................................................. 103

9.3 Investment Value............................................................................................................. 106

9.3 Investment Strategies....................................................................................................... 110

10 Beef Industry in United States............................................................................................ 110

10.1 Industry Profile.............................................................................................................. 110

10.2 Tyson Foods................................................................................................................. 111

10.2.1 Live Cattle Procurement............................................................................................... 111

10.2.2 Beef Products............................................................................................................. 112

10.2.3 Sales Revenue............................................................................................................ 113

10.2.4 Sales Profit................................................................................................................ 114

10.2.5 Brand Strategy............................................................................................................ 115

10.3 Smithfileld Foods........................................................................................................... 116

10.3.1 Live Cattle Procurement............................................................................................... 116

10.3.2 Beef Products............................................................................................................. 117

10.3.3 Sales Revenue............................................................................................................ 118

10.3.4 Sales Profit................................................................................................................ 119

10.3.5 Brand Strategy............................................................................................................ 120

11 Beef Industry in Brazil....................................................................................................... 122

11.1 Industry Profile............................................................................................................... 122

11.2 Grupo JBS-Friboi........................................................................................................... 123

11.2.1 Acquisition History...................................................................................................... 123

11.2.2 Live Cattle Procurement............................................................................................... 125

11.2.3 Beef Products............................................................................................................. 125

11.2.4 Sales Revenue............................................................................................................ 126

11.2.5 Sales Profit................................................................................................................. 127

11.2.6 Brand Strategy............................................................................................................ 128

Figures

Figure 1, China Cattle Inventory, 1998-2008.................................................................. 8

Figure 2, China Cattle Inventory Structure.................................................................... 9

Figure 3, China Beef Cattle Inventory Structure by Age & Gender................................. 9

Figure 4, China Beef Consumption Structure, 2007...................................................... 10

Figure 5, China Beef Product Structure, 2007.............................................................. 11

Figure 6, China Imported Beef Structure by Product, 2007........................................... 12

Figure 7, China Exported Beef Structure by Product, 2007........................................... 12

Figure 9, China Processed Beef Production, 2000-2008................................................ 15

Figure 10, China Household, Outdoor and Indutrial Beef Consumption, 2000-2008......... 15

Figure 11, China Beef Consumption in Urban & Rural Areas, 2000-2008....................... 16

Figure 12, China Household Foods Consumption, 1990-2008......................................... 16

Figure 13, China Household Foods Consumption Index, 1990-2008................................ 17

Figure 14, China Household Feeds Consumption Structure, 2007................................... 17

Figure 15, China Indices of Household Real Income, Beef Consumption and Beef Expenditure, 2000-2008 (index of 2000 be 100%)............................................................................................................... 18

Figure 16, China Household Beef Consumption Index of Urban Residents with Defferent Incomes, 2000-2006 (index of 2000 be 100%)........................................................................................................... 19

Figure 17, China Indice of Population and Household Beef Consumption, 2008 (index of 2000 be 100%)   20

Figure 18, Impacts of Urbanization on Household Beef Consumption in China, 2000-2008 21

Figure 19, Structure of Household Beef Consumption in China in 2013 and 2017............ 22

Figure 20, Per Capita Real Income and Outdoor Dinning Expenditure in China, 2000-2008 23

Figure 21, Indice of Population and Outdoor Beef Consumption of China, 2000-2008 (index of 2000 be 100%) 24

Figure 22, Growth Structure of China Outdoor Beef Consumption in 2013 and 2017....... 25

Figure 23, Production of High & Low tempreture Beef Products, Other Processed Beef Products and Total Processed Beef Volume, 2000-2008............................................................................................. 26

Figure 24, Net Beef Used by Processed Beef Products of China, 2000-2008................. 27

Figure 25, Production of High & Low tempreture Beef Products and Other Processed Beef Products, 2000-2008   28

Figure 26, Growth Structure of Total Processed Beef Products of China in 2013 and 2017 28

Figure 27, Per Capita Outdoor Dinning Expenditure in China, 2000-2008....................... 29

Figure 28, Indice of Real Income and Outdoor Beef Expenditure of China Residents, 2000-2008 (index of 2000 be 100%)......................................................................................................................... 29

Figure 29, Impacts of Urbanization on Outdoor Beef Consumption in China, 2000-2008.. 30

Figure 30, Consumption of Fresh Beef, Chilled Beef and Low Tempreture Processed Beef Products, 2000-2008     31

Figure 31, Product Structure of China Imported Beef in 2007....................................... 32

Figure 32, Source Structure of China Imported Fresh & Chilled Beef in 2007................ 32

Figure 33, Source Structure of China Imported Frozen Beef in 2007............................. 33

Figure 34, China Beef Imports, 2000-2008................................................................... 33

Figure 35, Main Players of Global Beef Exports in 2007............................................... 34

Figure 36, Main Players of Global Beef Imports in 2007............................................... 34

Figure 37, Destination Structure of China Exported Fresh & Chilled Beef in 2007.......... 35

Figure 38, Destination Structure of China Exported Frozen Beef in 2007....................... 36

Figure 39, Destination Structure of China Exported Live Cattle in 2007......................... 36

Figure 40, Retail Prices of Fresh Beef & Chicken Meat in China, 1997-2008................. 38

Figure 41, Per Capita Household Beef & Chicken Consumption of China, 2000-2008..... 39

Figure 42, Share of Beef Consumption Growth by Household, Outdoor and Industrial Beef Consumption, of China in 2013 and 2017.................................................................................................................. 40

Table 1, China Beef Supply & Demand Balance Sheet, 2000-2017............................... 41

Figure 43, Breeder Cow Inventory of China, 2000-2008............................................... 42

Figure 44, Yellow Cattle, Milk Cow and Buffalo Inventory of China, 2000-2008............. 43

Figure 45, Yellow Cattle & Buffalo Crop and Milk Cow & Breeder Cow Displacement of China, 2000-2008    44

Figure 46, Low-end, Middle-end and High-end Cattle Crops of China, 2000-2008.......... 45

Figure 47, Structure of China Cattle Inventory by Yellow Cattle, Milk Cow and BUffalo in 2007 46

Figure 48, Structure of China Cattle Crop by Yellow Cattle, Milk Cow and Buffalo in 2007 46

Figure 49, Structure of China Low-end Beef Cattle Crop in 2007.................................. 47

Figure 50, China Cattle Crop by Farm Size, 2000-2008................................................. 47

Figure 51, China Cattle Crop Index by Farm Size, 2000-2008 (index of 2000 be 100%).. 48

Figure 52, Cattle Crop in Farming Areas of China, 2000-2008....................................... 49

Figure 53, Cattle Cattle Crop by Provinces in Farming Areas of China in 2007............... 49

Figure 54, Cattle Crop in Grazing Areas of China, 2000-2008........................................ 50

Figure 55, Cattle Cattle Crop by Provinces in Grazing Areas of China in 2007............... 50

Figure 56, Cattle Crop in Northeast China, 2000-2008.................................................. 51

Figure 57, Cattle Cattle Crop by Provinces in Northeast China in 2007.......................... 51

Figure 58, Cattle Crop in Central China, 2000-2008...................................................... 52

Figure 59, Cattle Cattle Crop by Provinces in Central China in 2007.............................. 52

Figure 60, Cattle Crop in Northwest China, 2000-2008................................................. 53

Figure 61, Cattle Cattle Crop by Provinces in Northwest China in 2007......................... 53

Figure 62, Cattle Crop in Southern China, 2000-2008.................................................... 54

Figure 63, Cattle Cattle Crop by Provinces in Southern China in 2007........................... 54

Figure 64, Cattle Crop in All Cattle Zones, 2000-2008.................................................. 54

Figure 65, China Beef Production by Yellow Cattle, Buffalo and Breeder & Milk Cow Displacement, 2000-2008     55

Figure 66, China Beef Production Structure by Yellow Cattle, Buffalo and Breeder & Milk Cow Displacement in 2008   57

Figure 67, China Fresh, Chilled and Frozen Beef Production, 2000-2008........................ 57

Figure 68, Production of Low-end, Middle-end and High-end Beef in China, 2000-2008. 58

Figure 69, China Low-end Beef Production, 2000-2008................................................ 58

Figure 70, China Manufactured Feed Production, 1991-2007........................................ 59

Figure 71, China Manufactured Feed Production by Animal Type in 2007...................... 59

Figure 72, China Manufactured Feed Production (converted into complete feed) in 2007 60

Figure 73, Profits of Beef Cattle Rearing in Heilongjiang, Shangdong and Ningxia of China in 2007    70

Figure 74, Cost Structure of Beef Cattle Rearing by Backyard Farms of China in 2007 (labor cost not included)      71

Figure 75, Cost Structure of Beef Cattle Rearing by Large Farms of China in 2007....... 71

Figure 76, Profits of Beef Cattle Rearing by Backyard and Large Farms of China in 2007 71

Figure 77, Cost Structure of Beef Cattle Rearing by Backyard Farms of China in 2007 (labor cost not included)      76

Figure 78, Per Capita Meat Consumption Structure in United States in 2007.................. 77

Figure 79, Beef Cattle Crop Structure by Farm Size in United States in 2007................. 77

Figure 80, Beef Cattle Production Cost in United States in 2007................................... 78

Figure 81, Fresh Beef Wholeprice in United States, 2000-2007..................................... 78

Figure 82, Per Capita Meat Consumption Structure in Brazil in 2007............................. 79

Figure 83, Beef Cattle Crop Structure by Farm Size in Brazil in 2007............................ 79

Figure 84, Beef Cattle Production Cost in Brazil in 2007............................................... 80

Figure 85, Fresh Beef Wholeprice in Brazil, 2000-2007................................................ 80

Figure 86, Per Capita Meat Consumption Structure in Australia in 2007......................... 81

Figure 87, Beef Cattle Crop by Farm Size in Australia in 2007...................................... 81

Figure 88, Beef Cattle Production Cost in Australia in 2007.......................................... 82

Figure 89, Fresh Beef Wholeprice in Australia, 2000-2007............................................ 82

Figure 90, Per Capita Meat Consumption Structure in Canada in 2007.......................... 83

Figure 91, Beef Cattle Crop by Farm Size in Canada in 2007........................................ 83

Figure 92, Beef Cattle Production Cost in Canada in 2007............................................ 84

Figure 93, Fresh Beef Wholeprice in Canada, 2000-2007.............................................. 85

Figure 94, Fresh Beef Wholeprice in China, United States, Brazil, Australia and Canada, 2000-2007  85

Figure 95, Production & Sales Value of China Beef Industry, 2000-2007....................... 86

Figure 96, Value Structure of China Beef Industry, 2000-2007...................................... 86

Figure 97, Capacity Structure of China Beff Cattle Slaughterhouses in 2007.................. 88

Figure 98, Production Structure of China Beff Cattle Slaughterhouses in 2007............... 88

Figure 99, Regional Distribution of China Cattle Slaughter Capacity, 2007...................... 88

Figure 100, Product Structure of China Beef Industry, 2000-2007................................. 89

Figure 101, Product Structure of Large Slaughterhouses of China in 2007..................... 90

Figure 102, Marketing Channels of Large Slaughterhouses of China in 2007.................. 91

Figure 103, Live Cattle Procurement Sources of Fucheng in 2007................................. 94

Figure 104, Product Structure of Fucheng in 2007........................................................ 95

Figure 105, Structure of Sales Revenue of Fucheng in 2007.......................................... 96

Figure 106, Structure of Net Profits of Fucheng in 2007............................................... 96

Figure 107, Chilled Beef Production of China, 2000-2017............................................ 100

Figure 108, Frozen Beef Production of China, 2000-2017............................................ 100

Figure 109, Production of Processed Beef Products of China, 2000-2017.................... 102

Figure 110, Production & Sales Value of China Beef Industry, 2000-2017.................... 106

Figure 111, Product Structure of Beef Industry of United States in 2007...................... 110

Figure 112, Production Structure of Beef Companies of United States in 2007.............. 110

Figure 113, Product Structure of Tyson Foods in 2007................................................. 111

Figure 114, Revenue Structure of Tyson Foods in 2007............................................... 112

Figure 115, Profit Structure of Tyson Foods in 2007.................................................... 113

Figure 116, Product Structure of Smithfield Foods in 2007........................................... 113

Figure 117, Revenue Structure of Smithfield Foods in 2007......................................... 117

Figure 118, Profit Structure of Smithfield Foods in 2007.............................................. 118

Figure 119, Product Structure of Beef Industry of Brazil in 2007................................. 122

Figure 120, Production Structure of Beef Companies of Brazil in 2007........................ 122

Figure 121, Product Structure of TJBS in 2007.......................................................... 125

Figure 122, Revenue Structure of JBS in 2007........................................................... 126

Figure 123, Profit Structure of JBS in 2007................................................................ 127