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Cablegate: (Sbu) U.S. Chicken Exporter Facing Trade Financing

VZCZCXRO9142
RR RUEHCN RUEHGH
DE RUEHGH #0557/01 3530104
ZNR UUUUU ZZH
R 180104Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7447
INFO RUEHBJ/AMEMBASSY BEIJING 2373
RUEHCN/AMCONSUL CHENGDU 1624
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 0083
RUEHHK/AMCONSUL HONG KONG 1792
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8058
RUEHSH/AMCONSUL SHENYANG 1616
RUEHGP/AMEMBASSY SINGAPORE 0197

UNCLAS SECTION 01 OF 02 SHANGHAI 000557

SENSITIVE
SIPDIS

TREASURY FOR AMB HOLMER/WRIGHT/TSMITH
TREASURY FOR OASIA/INA - DOHNER/HAARSAGER/WINSHIP/CUSHMAN
TREASURY FOR IMFP - SOBEL/MOGHTADER
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA
NSC FOR WILDER/LOI
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN
STATE PASS CFTC FOR OIA/GORLICK

E.O. 12958: N/A
TAGS: CH EFIN ECON PGOV ETRD
SUBJECT: (SBU) U.S. CHICKEN EXPORTER FACING TRADE FINANCING
DIFFICULTIES

1. (SBU) Summary. A shortage of trade finance in Hong Kong is
causing problems for Tyson Foods, Inc., imports of chicken into
China. The troubles with trade finance are squeezing the US$400
million in revenues that Tyson earns annually from chicken parts
sales in the China market. The high margins for chicken feet
sales to Hong Kong traders had been a key profit center for
Tyson, so U.S. chicken prices may rise if the difficulties
continue, said our Tyson contact. In the medium term, Tyson
expects competition with Brazil for the China market to heat up.
Separately, Tyson has noticed an uptick in local government
attention to environmental controls, and also reports that the
pool of available low-skill labor is significantly larger. End
summary.

============================
Financial Crisis Hitting Hong Kong Traders . . .
============================

2. (SBU) A shortage of trade finance in Hong Kong is causing
problems for Tyson Foods, Inc., imports of chicken into China.
Jim Rice, Tyson's Country Manager for Greater China (please
protect), who is based in Shanghai, told Congenoffs on December
5, 2008. Hong Kong banks are not lending to the middlemen who
traditionally have imported the chicken parts -- mostly chicken
feet -- because the banks are raising their assessment of risks.
First, the banks are demanding that borrowing be
overcollateralized. Where before the Hong Kong traders had been
able to borrow twice or more the value of their collateral --
typically property in Hong Kong -- now the banks are willing to
lend only 80 percent of the value. Rice speculated that this
may be related to the decline in property values in Hong Kong.
Second, Rice suggested that Hong Kong banks are reassessing risk
in the China market, perhaps anticipating a downturn in consumer
demand and seeking to reduce their exposure. According to
Rice's estimate, the financing problems began the week of
November 17.

3. (SBU) The troubles with trade finance are squeezing the
US$400 million in revenues that Tyson earns annually from
chicken parts sales in the China market. As Rice described it,
Tyson processes 45 million chickens a week in its U.S.
facilities, resulting in 90 million chicken feet that would go
to waste if not for the China market. The feet have an imputed
value of 2 cents a pound in the United States, but in recent
years have sold for 70 cents a pound in the China market, said
Rice. With the financing troubles, however, Tyson cannot move
the volume of chicken feet required, and the Hong Kong traders
that are able to access financing are in a buyer's market. As a
result, the price that Tyson can get in the Hong Kong market has
plummeted to 30 cents a pound.

============================
. . . And Could Redound to U.S. Consumers
============================

4. (SBU) The high margins for chicken feet sales to Hong Kong
traders had been a key profit center for Tyson, said Rice, so
U.S. chicken prices may rise if the difficulties continue. The
front half of the bird is generally sold in the U.S. market,
while the back half is sold abroad: the leg quarters to Russia
and the feet to China. (Note: Rice said that Tyson's problems
were worsened by the continuing problems with sales of legs in
Russia due to the economic downturn and protectionism there.
End note.) One-quarter of U.S. poultry industry profits are
from China, and if the problems are not resolved, chicken prices
in the United States could double, said Rice.

5. (SBU) Tyson is not prepared to take on the financing risk
itself, said Rice. The poultry business already has large
invested operating capital, since the "grandparents" of the

SHANGHAI 00000557 002 OF 002


flocks must be cultivated in order to have the necessary meat
and egg production levels. Tyson sells the chicken feet to Hong
Kong traders on a cash-before-shipment basis through letters of
credit.

============================
Tyson's Competition With Brazil
============================

6. (SBU) Farm products shippers in Brazil offer Tyson its main
competition in the China market, said Rice. Altogether, in
addition to the past sales of US$400 million in chicken parts,
Tyson supplies the China market with US$200 million in beef --
also through Hong Kong channels -- and US$100 million in hides.
Currently, Brazilian chicken exporters do not have an agreement
with China's General Administration of Quality Supervision,
Inspection and Quarantine (AQSIQ), so the difficulties they have
in moving product through Hong Kong add significantly to their
costs. However, Brazil is home to the lowest cost producers,
and they are set up specifically for exports, so eventually they
will be much more competitive in the China market.

============================
Observations on Environmental Controls, Labor Movements
============================

7. (SBU) Rice said that he was impressed with the priority that
localities were paying to pollution control requirements for
foreign investors. Recently, Tyson was meeting with the Mayor
of Changchun with respect to negotiations over basing a facility
there. Rice said that the first question the mayor asked was
how much the facility would pollute, and what the environmental
impact would be. In years past, said Rice, the topic would not
even have been raised.

8. (SBU) In a comment on the movement of migrant labor
conditions in coastal China, Rice said that his employees report
that there are already some 100,000 people a day waiting for
trains at the Guangzhou Railway Station in what appears to be an
earlier than usual wave of workers returning home for Spring
Festival. His human resource personnel also say that the labor
shortage of recent months has reversed, and there is no longer a
problem to higher low-skill laborers. There are now plenty of
people willing to work for low wages, Rice said.
CAMP

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