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