Introduction
1. The Council welcomes the invitation to provide comments on the Government's proposal to introduce measures to reduce the threat from the avian influenza virus. The Council wishes to address two general issues related to the proposals. The first relates to
- the threat to community health posed by the avian influenza virus; and
- the second relates to the impact the Government's proposals will have on the markets for supply and demand of chicken meat, and the consequences for consumers.
Implications for health of the community
2. The Council supports the recommendation on the introduction of further measures to improve farm biosecurity in order to reduce the possibility of incursion by avian influenza virus into farms, in addition to those already introduced by Government after the 2002 incident. While on this recommendation, the Council opines that the following should be considered in implementing the new measures:
- As workers, equipment like chicken cages, showers, changing facilities and chicken feeds etc. might potentially be contaminated during the chicken rearing process, the requirement of installation of a proper disinfection system should be included in the licence conditions. AFCD should provide specific guidelines for such disinfection systems for the benefit of farm operators and workers.
- Free flying birds may be attracted by the food supplies of poultry farms. To reduce the risk of virus transmission from farm to farm, it is advisable for chicken farms to be securely fenced to prevent entry of outside birds.
3. On the recommendation of reducing live poultry volume and increasing the availability of chilled poultry products to reduce the risk of H5N1, the Council accepts that such a measure will reduce the chance of avian influenza outbreak. However, the Council notes that new problems in respect of the hygiene conditions of chilled poultry may emerge.
4. Due to the considerable price difference between frozen, chilled and freshly slaughtered chickens, there have been repeated allegations that frozen thawed chickens were sold as chilled or freshly slaughtered chickens to deceive consumers. This has presented problems in that consumers were not getting value for their money, and consumer health could also be affected as the thawed poultry was not placed in suitable chillers (as required under the licence conditions). With increased imports of chilled chicken and the presence of the 3 types of chicken in the market at the same time, the Council considers it to be of utmost importance for the government to step up measures to protect consumer interests.
5. It is indeed difficult, if not at all impossible, for consumers to differentiate frozen thawed, chilled and freshly slaughtered chickens. Clear indication or labelling of the poultry (frozen, chilled or fresh) is necessary to protect the interests of consumers.
6. It has been suggested that, in order to help consumers differentiate the products, the heads and feet of chilled chickens should be removed before they are imported. The Council will leave this to the trade to work out an effective differentiation method between frozen, chilled and fresh chicken, while at the same time balancing the interests of those who cannot afford to buy fresh chicken for religious purposes. Traditionally, consumers pay tribute to the deity and ancestors with a whole chicken (head and feet all intact).
7. On the recommendation of adding one rest day in the marketplace, while the Council feels that it will be effective in reducing the viral load, AFCD and FEHD should pay extra attention to the possible increase in supply of illegal poultry, either smuggled or reared in non-licensed farms on the rest days.
8. The Council supports that the review of the results of the vaccination programme implemented in Pak Sha area is necessary before determining the role of vaccination in the overall control programme of H5N1 avian influenza virus in Hong Kong.
9. In view of the above, the Council has the following recommendations:
Recommendation 1
The Government should consider to incorporate in the licence conditions the requirement for installation of a proper disinfection system for both workers and equipment in chicken farms. Guidelines on the installation and use of such disinfection systems should be given to chicken farm operators and workers.
Recommendation 2
To avoid transmission of virus from farm to farm, chicken areas should be securely fenced.
Recommendation 3
FEHD should consider tightening up the existing monitoring measures to ensure that the increase in importation of chilled poultry products will not generate problems affecting consumer health.
Recommendation 4
For both prepackaged and non-prepackaged poultry products, clearer information should be given to consumers on whether they are freshly slaughtered, chilled or frozen, by way of labeling on the product or proper display of information on the shelves.
Recommendation 5
Vigilant enforcement action would also be necessary.
Impact on markets
10. There are two recommendations in the consultation paper that have a potential effect on competition in the market for chicken meat. These are:
- Increasing bio security of local chicken farms. The Consultation Paper notes that the additional requirements chicken growers have to meet, in order to maintain their licenses, will increase the costs of raising chickens and that some farms may not be able to meet these new requirements and will have to close.
- Reducing the volume of trade in live chickens; and increasing the number of rest days when no fresh chickens will be allowed for sale. This will have the effect of restricting output of fresh chickens.
11. As noted in the consultation paper, the likely effect of the additional farm security requirements will most likely force some of the less efficient growers, particularly local growers, from the market. More importantly, the government's efforts at reducing the volume of trade in live chickens as noted in (b) above, will restrict output commensurate with the increased number of days in which the selling of fresh chickens in wet markets will be prohibited.
12. The Government suggests in its Consultation paper that chilled chicken is the natural substitute for fresh chicken, and that supply of chilled chicken, adequate to meet demand is therefore an issue that needs consideration. The government states that it will carefully consider the need to build a central slaughterhouse (to secure a domestic source of chilled chicken meat) but does not see the need as yet because of what it says is the wide availability of cheap imported chilled chicken.
The chilled chicken meat market
13. Whether chilled chicken is a natural substitute for fresh chicken is not immediately apparent. If the products are natural substitutes, then it would be expected that more chilled chicken than is currently available would be offered for sale and the supply of both would affect the prices on offer. Nevertheless, given that supply of fresh chicken will be curtailed, an assumption can be made that some demand will be diverted to chilled chicken.
14. The consultation paper does not provide any details on the current extent of wholesale supply and retail of chilled chicken. The Council understands that the current share of chilled chicken in the overall supply of chicken meat (frozen, chilled and fresh) is around 2%. As far as supply and retail are concerned:
- at the wholesale level, Chinese mainland exporters previously supplied the local market with chilled chicken but this stopped in 1998, and several overseas suppliers entered the market; and
- at the retail level wet markets do not sell chilled chicken that has been imported, but some wet market operators do sell chickens freshly slaughtered and presented for sale in a chilled state for a quick sale. Chilled chicken is usually imported by Western style restaurants, supermarkets, and delicatessens.
15. There are no apparent barriers to market entry, and there do not appear to be onerous licensing or other government imposed restrictions that will inhibit the development of the wholesale and retail market for chilled chicken. It is expected therefore that the number and size of operators will be determined by the extent of the demand, and the availability of supply from the mainland.
16. In order for chilled chicken to compete with fresh chicken its price will need to be very competitive. This will require traders to utilize economies of scale in food processing and distribution. As a result, the number of importers in the long run will most likely be small. However, because the market will be in its infancy, at the point at which the government's proposals to restrict output will apply, the Council believes that there will be the potential for distortions to arise in the market becoming fully competitive in the long run.
17. For example, a market participant (with first mover advantage) might restrict new entry at the supply level through restraining retailers from obtaining supplies from competitors (through exclusive supply agreements) thereby locking in substantial numbers of retailers, and denying new wholesale entrants viable outlets. On the other hand, vertical restraints on third party supply by retailers might actually serve the purpose of strengthening the competitive position of suppliers who are challenging established wholesale suppliers.
18. Whether restraints described above become a problem depends on the extent of market power held by the party imposing the restraint. It is instructive to note that the Government has not indicated an assessment of the likelihood of competition developing in the market, apart from its observation of "the availability of relatively cheap imported chilled poultry products". The Council's limited inquiries indicate that at the present time there is not sufficient chilled chicken coming in from the mainland to satisfy the expected demand that will arise from a dramatic reduction in the supply of fresh chicken to retail customers.
Competitive safeguards
19. It is likely that the chilled chicken wholesale supply and retail market will take some time to adjust, in which case the Council believes there will need to be some oversight to ensure that the market reaches a position that results in competitive market prices and wide choices for consumers. In view of the government's Statement on Competition Policy[1] which applies a sector specific approach to competition oversight in the economy, it is apparent that the Food and Environmental Hygiene Department (FEHD) has the responsibility to assess the likely impact on competition of its policy proposal, and to maintain adequate competition oversight following implementation of its intervention in the market.
Proposed recommendations to FEHD
20. In view of the above, the Council's submits that FEHD should consider the following.
Recommendation 1.
FEHD should assess the likelihood of new entry into the market for chilled chicken meat, and the extent to which any preparatory negotiations should be undertaken with potential new entrants to encourage entry in order to satisfy demand arising from FEHD's reduction in supply of fresh chicken.
Recommendation 2.
FEHD should develop a strategy in which it can assess the extent to which competition is emerging in the market, and consider what mechanisms it should have in place to address any problems that are emerging. The strategy should be based around the following outcomes.
Consumer outcomes
Consumer satisfaction can be measured by examining
- prices, to gauge whether they broadly reflect underlying costs (i.e. that there is an absence of persistent excessive profits);
- that there is a wide range of product choices available to consumers; and
- that consumers are satisfied with the quality of the product
Supplier behaviour
As far as retail outlets are concerned, there is
- active competition in price, product choice and quality;
- absence of anti-competitive agreements between competitors;
- absence of misleading conduct (i.e. falsely describing frozen thawed chicken as chilled) that can harm the competitive position of honest retailers who correctly describe their product;
- absence of vertical restraints on retailers, but only those that have the long term effect of substantially lessening competition;
Market structure
The overall market structure should be examined periodically to assess that
- there are limited entry barriers for potential competitors;
- there is limited ability for operators with market power in related markets to lever market power into the particular market segment; and
- changes in market structure over time do not result in situations conducive to a lowering of competition, i. e. guarding against a tendency towards increased market concentration.
Notes:
1. The Hong Kong Government issued a Statement on Competition Policy in May 1998. This document outlines the process under which, and the general policy direction the Government will take, in regard to ensuring that competition is used as a means to achieve the objective of enhancing "economic efficiency and free flow of trade, thereby also benefiting consumer welfare". See http://www.info.gov.hk/esb/refer/papers/report/htm
