February 10, 2004
Taiwan's 2004 Beef Consumption Set To Fall 13%
Taiwan's 2004 beef consumption is expected to fall by 13% in 2004 to 66,200 metric tons (90,000 MT CWE) because of the discovery of bovine spongiform encephalopathy in the U.S., according to information from the U.S. Department of Agriculture's Foreign Agricultural Service web site.
The discovery of BSE in the U.S. in December 2003 has dramatically reshaped the Taiwan beef market. Beef consumption is expected to fall by 13% in 2004 to 66,200 MT (90,000 MT CWE), reversing steady increases since 2001. Consumption is expected to drop because of higher prices, increased concerns about food safety and a sharp cut in available beef supplies, the press release said.
Prices of beef have increased sharply as stocks have fallen and Australia and New Zealand are unable to make up for lost U.S. supplies. The burdens of high prices and short supplies will likely fall especially hard on high-end restaurants. In addition, the privileged tariff position of U.S. choice and prime beef ended on Jan. 1, 2004 with the equalization of all beef import tariffs.
Imports of beef variety meats were fully liberalized upon Taiwan's WTO entry. Without cumbersome bidding for quotas and with lowered import tariffs, imports of beef variety meats should grow healthily in the coming years. Since BSE is likely to keep U.S. product out of Taiwan into 2005, liberalization will boost the already strong position of suppliers from Australia and New Zealand, who will take largest market shares.
The ongoing outbreak of Porcine Circovirus (PCV) has depressed local swine production, keeping local pork prices high. This will likely stimulate pork meat imports although more than 95% of consumption is supplied locally. In the long term, Taiwan's relatively efficient pig industry will only contract slowly, continuing to produce pork for the local market while imports enter for processing or during period of high prices.
The demand for imported pork variety meats, which adds to the reduced local supply since the 1997 foot-and-mouth disease outbreak, is expected to remain strong for the foreseeable future. As Taiwan's current leading supplier of pork and pork offal, U.S. suppliers should benefit most from WTO market opening measures. Sanitary concerns are likely to keep key competitors, such as South Korea and Mainland China, off the market for several years.
Production
Domestic beef, mostly from culled dairy cattle, meets only 5% to 6% of Taiwan's total beef demand. Total production is only expected to contact slowly in 2004 and beyond.
Consumption
Consumption is expected to drop because of higher prices, increased public concerns about food safety and a sharp cut in available supplies to the Taiwan market. For example, the price of New Zealand tenderloin is up by nearly 40% while prices for some U.S. cuts held in stocks have doubled. The price hikes are expected to worsen as stocks fall. In addition, supplies will be further limited by the fact that New Zealand and Australia packing plants often close in January and that their grain fed beef is usually sold by the full set, which will force importers to find ways to dispose of unwanted cuts.
This has put considerable pressure on Taiwan's HRI sector, which is the largest importer of high quality U.S. beef. This will be difficult for both high-end restaurants that rely on quality U.S. beef and less expensive establishments whose thinner margins will be squeezed by high prices.
Although it is too early to predict exactly when the Taiwan market will reopen to U.S. beef and products, this report assumes it will open in September 2004. In 2005, consumption is expected to increase to 69,850 MT (95,000 MT CWE) as U.S. beef re-enters the market, assuming there are no further BSE detections or another SARS outbreak. After this, beef consumption is expected to recover in line with Taiwan's economic growth that is expected to reach 4.8% in 2004. Moderate economic growth, the continued stability of the New Taiwan Dollar, continued public confidence in Taiwan's food safety system and pent up demand should support higher beef consumption in the future.
Trade
Total imports in 2004 are forecast at 62,500 MT (85,000 CWE) in 2004 with U.S. beef exports at 4,000 MT (2,900 MT CWE) or only 3.4% market share. Since Taiwan imports 95% of its beef consumption, imports and consumption tend to move together except when stocks build up. The recent suspension of U.S. beef exports to Taiwan sharply cut supplies, which can only partially be filled by beef from Australia and New Zealand. Taiwan will also need to compete with high-paying Japan and Korea for supplies, further limiting imports.
Imports in 2003 increased by 22% to 72,065 MT (98,000 MT CWE), despite the SARS scare in the first half of the year. U.S. beef imports totaled 16,119 MT (22,000 MT CWE), representing 22.4% of total imports.
Taiwan's only FTA to date is with Panama. Although this allows free imports (no quantity limit, zero tariff) of beef beginning Jan. 1, 2004, Taiwan has only approved two packing plants. To avoid transshipments from other Latin American countries, imports from Panama require a government issued Country of Origin certificate with ranch and packing plant locations listed. Cattle tag/tattoo numbers will also be required starting Jan. 1, 2007.
In July 2003, Nicaragua was approved to supply beef and products to Taiwan but only three packing plants have been approved. In February 2004, a beef sourcing team encouraged by the Nicaraguan Embassy along with Taiwan's Ministry of Foreign Affairs and the Bureau of Foreign Trade will visit Nicaragua.
Beef Variety Meats
BSE is likely to push down demand for beef variety meat imports 2,700 MT in 2004. This forecast is based on subtracting the U.S. and Canadian market shares of 698 and 117 tons out of the total 2003 imports (3,448 MT). Although there are some new suppliers approved for Taiwan such as Nicaragua, it will take time for them to make products to Taiwan specifications. Honeycomb and tendon account for the majority of Taiwan's beef offal imports, unlike other Asian markets that import mainly tongues and intestine.
Prices should hold fairly steady for beef offals in Taiwan. Since Taiwan is one of the largest importers of honeycomb, supplies are contracted for in advance and mostly come from Australia and New Zealand. In addition, Japanese and Korean consumers have shied away from all beef consumption, which may result in some overstock of beef offal in Australia or New Zealand.
Industry sources also expect that even if muscle meat is allowed entry later in 2004, beef offal may have to wait longer time because of sanitary concerns. As a result, the report assumes that no U.S. beef offal will enter Taiwan in 2004.
In the long run, offal imports should be supported because local demand exceeds supply. However, Australia and New Zealand will likely continue taking the largest market shares because of their locations close to Taiwan. Since offals are a lower cost product than muscle meat, their lower transport costs will give them a major advantage in the Taiwan market.
Imports of beef offal, once subject to an import quota, were liberalized on Jan. 1, 2002 in line with Taiwan's accession to the World Trade Organization.
Tariffs & Trade Policy
The duty for all beef products is NT$10 per kilogram, ending a market advantage for some U.S. exports. Starting Jan. 1, 2004, the Taiwan ended a small preferential tariff formerly given to Special Quality Beef (SQB), defined as USDA-graded prime or choice beef and Canadian AAA beef. Another preferential tariff for muscle meat such as shin, shank, short plate, brisket, ribs, and rib finger classified as shin/shank/intercostal (s/s/i) cuts also ended at the same time. On the other hand, falling duties are expected to increase overall trade, especially in shoulder cuts or products customized for the Taiwan market.
The tariff for beef offals is now 15%, ending a series of reductions starting after Taiwan's WTO accession, the press release said. Import tariffs for beef offal formerly ranged from 20% to 50%. The duty for bovine bones is 35%.
Sanitary Regulations
In order to export beef or any meat to Taiwan, a country's quarantine inspection and health certification system must be reviewed and approved by the Taiwan authorities. Currently, the only countries eligible to supply beef or beef variety meats to Taiwan are: Australia, New Zealand, Nicaragua, Panama and Sweden. Although Taiwan accepted Japan's FMD-free status in late 2001, entry is still banned along with U.S., Canadian and most types of European beef because of BSE.
Until the Dec. 24, 2003, BSE detection in the U.S., Taiwan consumers did not associate beef consumption with BSE - unlike some neighboring economies. While earlier press coverage was rational and short-term, the negative effects since December will probably take longer to reverse. Early reports indicate the demand fell by 20 percent in early January, but this result came just after a period of intense negative reporting on the subject.
Imports of beef and products from the United States and Canada were suspended on Dec. 24 and May 21, 2003, respectively, in response to single BSE detections in each country. New Zealand and Australia are expected to take half of North America's market share as long as the bans stay in place.
The Dairy Sector
The profitable dairy industry is only expected to contract slowly following the removal of the fluid milk import ban after WTO entry. The increasing acceptance of long-life (UHT or ultra high temperature pasteurization) will increase competition for locally sourced fresh milk. The stable market for fluid milk and the limited market share of competing milk powder will also slow the contraction of local production.
Marketing
Although demand for beef fell sharply, industry sources believe that consumers concerns about the safety of U.S. beef in the aftermath of BSE can be resolved. This process has been set back as suppliers from other countries have taken advantage of this situation. For example, restaurants now often have signs saying they only use only Australian beef. The local Burger King franchise is now promoting the Australian origin of the meat used in their hamburgers.
The U.S. BSE detection has interrupted U.S. imports to Taiwan, forcing local restaurants to find alternative suppliers, pay higher prices and switch to different menu items. This has fallen heavily on the high-end restaurants that were traditionally the largest buyers of U.S. beef. These establishments often built brands based on U.S. beef.
They will have difficulties adjusting to short U.S. supplies since supplies of high-quality Australia and New Zealand beef are insufficient to meet demand. Until U.S. market access can be restored, it will be important to continue communicating the safety and quality messages of U.S. beef. Competition from Australia and New Zealand is strongest in the lower end food service sector and in supermarkets.
To recover market share, the most critical mission will be to communicate the food safety message of U.S. beef. Fortunately, Taiwan's strong record on food safety should make it easier to communicate the facts about U.S. beef to the public. The resumption of trade will also require the U.S. to address increasing competition with Canada, Australia and New Zealand. The ability to add value to products through custom cutting or other quality enhancements is a key element to avoiding relentless price competition. U.S. beef exporters will need to continue developing premium brands by working with key hypermarket chains and by developing new, less expensive cuts that compete favorably with Australia and New Zealand beef on flavor, tenderness and price.
In the long run, BSE has cast some doubt on the continued viability of the U.S.- New Zealand-Australia-Canada Beef Alliance created to increase demand for beef products. The Beef Alliance was created to promote overall consumption of beef, which is a modest 3 kg per year. By emphasizing the nutritional benefits of beef, especially to women, the Beef Alliance hoped to make it a more regular part of the family menu. However, diverging interests of members may require a reevaluation of the Alliance.
Production
In 2003, swine production (fat pigs slaughtered) is estimated at 9.43 million head, down 6% from the 2002 total of 9.9 million and 7% from the post- FMD outbreak peak of 10.1 million head in 2001. Post forecasts that total 2004 slaughter will increase by less than 1% to 9.5 million because of disease problems. These totals exceed COA's "target" production of 9.3 million.
The most recent pig inventory survey conducted in November 2003 revealed only nominal increases in herd size compared to 2002. Despite ongoing attempts to increase herd size in response to high prices, production is continues to be hampered by a persistent outbreak of Porcine Circovirus Infection (PCV), which has high mortality in pigs weighing between 15 to 30 kg. If Taiwan gets PCV under control mid-2004, high prices are expected to result in a larger number of breeding and standing pigs.
Long-term Trends
In the long term, the largely efficient Taiwan swine industry will continue to produce pork for the local market, with imports mainly used for processing or to supplement occasional shortfalls. Pork production will likely eventually stabilize because of Taiwan's relatively cost-competitive structure, with current production costs estimated at 1.2 to 1.7 times North American and European levels, the press release said. Although pessimists feared that total herd size would quickly fall to 6.0 million, it seems more likely to stabilize at 6.5 million in the next 3-4 years.
The decline of Taiwan's swine sector is expected to continue because several factors:
- Realization that export markets lost because of Taiwan's 1997 Foot and Mouth Disease (FMD) outbreak will not recover fully in the near term.
- Continuing high feed prices, which have increased interest in importing feedstock from new origins (such as corn from the PRC).
- Increasing post-WTO accession import competition, especially from imported offals.
- Rising environmental pressures (especially waste disposal) that will increase costs of production. Note: Although Taiwan' Environmental Protection Administration relaxed Taiwan's pig wastewater standards at the request of COA the farmers, the long-term trend is still toward stricter regulation.
- Retirements of elderly farmers.
- Increasing pressure to divert land to more valuable uses.
The most serious problem facing Taiwan's swine industry is the loss of export channels resulting from the 1997 FMD outbreak. Before 1997, Taiwan was a net exporter of prime pork meat to Japan with the offal left for domestic consumption. The FMD outbreak caused massive losses from suddenly closed export markets and the costs of depopulating 30% of the swine population (3.8 million head). The number of swine farms fell by almost half from 25,300 in 1997 to 13,000 in 2002, with smaller farms failing the most often.
Despite this contraction, 43% of total farms still have less than 100 head while 25% have less than 20. The large number of small farms and aging farmers point to continuing consolidation in the swine sector. Most swine production is concentrated in the southwest part of Taiwan in Pingtung, Yunlin, Changhua and Tainan Counties.
Although Taiwan has been FMD-free since 2001 and was declared FMD-free in 2003 with vaccination by the Office International des Epizooties (OIE), exports are not likely to recover to pre-1997 levels. COA hopes to restart exports to Japan in 2005 although they admit this estimate is quite optimistic and dependent on Taiwan avoiding another FMD outbreak. In addition, Japan will only accept imports from countries that are FMD-free without vaccination, which can only come after a region has been FMD free for a year without vaccination.
Even if Taiwan does resume exports, it is very unlikely that trade will return to pre-1997 levels because of lost marketing channels and a loss of positive consumer awareness in Japan. The most optimistic estimate is that Taiwan will export from 80,000-100,000 MT by 2005 - which is down sharply from 270,000 MT in 1996, the press release said. In addition, hard-won access to foreign markets will remain tenuous because of possible FMD or other disease introductions caused by contraband imports of Chinese swine.
Pig farms have also suffered because of price competition. Post-WTO offal imports have lowered revenue from offal sales by as much as half, from NT$400 versus NT$800 per head.
This will force pork meat exporters to raise their prices, further reducing competitiveness. This has created a growing realization that exports will not return to pre- FMD levels, which is causing farmers to stop swine production. Farmers are also aging rapidly, which will also likely reduce the number of farms, especially smaller facilities.
After consolidation, production costs should be even lower than at present, leaving the remaining farms more competitive. This contraction in domestic production and the ongoing consolidation of small farms will likely result in increased long-term import demand for pork meat and offal.
Prices
Pig prices, which rose to over NT$6,000/100 kg (US$174) in July have remained high since then. As a result of PCV, production will remain depressed for the next several months, supporting high prices. Later in 2004, high prices and an eventual reduction in PCV will likely result in expanded herd size despite increasing import competition spurred by increasing TRQ sizes for pork belly and offal. The likelihood of increasing supplies combined with full liberalization of pork product imports in 2005 has caused concern in COA that late 2004 may being a collapse in pig prices. Since local pork is not considered a substitute for beef, prices are not expected to change because of short beef supplies caused by BSE.
In 2002 (the latest available data), the break-even point for hog production was slightly more than NT$4,000/100 kg live weight. Higher feed prices and rising costs for piglets to NT$1,000/head caused by PCV have pushed production costs closer to NT$4,300/100 kg. Taiwan farmers tend to keep the pigs longer (about 6.5 months) on farm than their U.S. counterparts. The average weight for slaughter pigs has remained at 110 kg/head for years.
The direct cost of hog production was NT$3,898/100 kg in 1999 and NT$3,676/100 kg in 2000. (Source: Animal Technology Institute, Taiwan) In 2001, production costs were estimated at around NT$3,800/100 kg and auction prices averaged NT$3,997/100 kg.
Consumption
Taiwan's pork consumption tends to be very stable from year to year, moving in a box around 940,000 to 970,000 tons. Forecast consumption is 955,000 MT in 2004, the press release said. Pork and beef are not close substitutes in the Taiwan market: Changes in pork prices do not affect beef demand significantly or vice versa. BSE is not expected to markedly change pork demand. Taiwan's pork consumption is around ten times as large as its beef consumption. The latter also tends to be more specialized in the HRI sector.
Trade
Spurred by continued high Taiwan prices, pork meat imports are expected to total 60,000 tons (CWE) in 2004. The PCV outbreak kept prices high and stimulated imports totaling 54,000 tons (CMW) in 2003. Unlike beef, the vast majority (96% from 2002-03) of pork meat consumed in Taiwan is produced domestically. Although post-WTO liberalization and high Taiwan pork prices have sharply increased pork meat imports in 2002 and 2003, total volumes remain low. Given the competitiveness of Taiwan pork production, trading volumes and market shares are very sensitive to price and imports and mostly exist on the margin.
According to industry sources, imports can rise above 3,000 tons per month if Taiwan pig auction prices rise above NT$5000/100 kg. However, high supplier prices can sharply cut trade - even when Taiwan has high prices. For example, if prices of imported products exceed 38 cents/pound, imports will fall by more than half, to around 1,400 tons per month.
Trade sources believe that the market for imported pork meat opens when local auction prices rise above NT$5,500/100 kg.
As another indicator of this market's extreme price sensitivity, U.S. market share has suffered major losses in 2003 because of high U.S. prices and lower prices in Canada. Canada more than doubled its market share in the last two years at the expense of the U.S.
In contrast, pork offal demand will likely remain strong in 2004 and
beyond as processors find new ways to utilize variety meats. It seems likely that the offals TRQ will be fully utilized in 2003 but 2004 remains uncertain. As a result of high prices, the U.S. lost market share to Canada and European suppliers. U.S. packers have been modifying their production specifications in order to restore their dominant position in the Taiwan market.
Products Entering Under TRQs
Total 2003 TRQ imports were 10,104 tons for pork belly and 18,192 tons for pork offal. (Source: Central Trust of China). Country breakdown for TRQ imports are given below. High Taiwan pork prices and depressed production points to strong imports of both pork offal and pork bellies in 2004. However, the TRQs may end up exceeding local demand, impeding TRQ fill in 2004 especially for pork bellies if Taiwan pig prices fall. COA estimates demand for imported bellies at 10,000 tons and offals at 20,000 tons, but this figure assumes lower pig prices than current levels.
In 2003, the demand for pork offal was very strong, resulting in almost complete TRQ utilization (97%). Belly spare ribs (soft ribs) continue to be the most popular item in the belly quota. The demand for pork belly was lower but the fill rate was boosted to 94% by high domestic pig prices.
Outside the TRQ, both pork bellies and pork offal are subject to special safeguards (SSG), which allow higher (up to 33%) duties under the WTO Agreement on Agriculture. The 2003 high out-of-quota duty (55% for pork offal and 287.5% for pork offal) will definitely discourage any imports after quota is filled, let alone the duty surcharge under the SSG. However, in 2005, the high out of quota duties will end.
Trade in pork bones in 2003 of 7,129 tons was up sharply from 2002 levels of only 943 MT. Imports included 3,437 tons from Canada, 595 tons from Denmark, 296 tons from Sweden; 484 tons from Australia, 510 tons from Hungary - and 1,807 tons from the U.S.
Policy
Upon Taiwan's WTO accession, the former global quotas for pork bellies and pork offal were transformed into Tariff Rate Quota (TRQ). In 2004, the quotas sizes are 15,400 MT for bellies and 27,500 MT for offal. Tariff rates were also lowered with WTO entry. In 2004, quotas for pork bellies and pork offal increased and tariff rates declined. In 2005, the TRQs will be phased out and duties bound at 12.5% for pork meat and 15% for pork offal. However, SSG duties will come into effect when trigger levels are reached.
All TRQ items have been moved to a new Chapter 98 of Taiwan's Tariff Schedule. Pork products not subject to TRQ or enter outside of the TRQ (and are subject to out-of-quota rates) are classified under the original tariff classifications in Chapter 2 (for uncooked meat), Chapter 5 (for animal offal) and Chapter 16 (for processed meat). TRQs are open to all WTO members meeting Taiwan's quarantine requirements, except products from the People's Republic of China, which are banned.
TRQ Regulations
In August 2004, Taiwan announced its 2004 TRQs, which total 15,400 MT for pork bellies and 27,500 MT for offals. Unlike in earlier years, around half of the 2004 TRQ was allocated to importers based on previous two years' import record. This removed much of the uncertainty from the quota distribution process and will help importers make better long-term plans. The remaining TRQ for pork belly was allocated through an auction. Importers or exporters registered with Taiwan's Board of Foreign Trade are eligible to apply.
Under the terms of Taiwan's WTO accession agreement, TRQ certificates are valid from Jan. 1 to Sept. 1 and can be extended to Dec. 31 upon presentation of a signed contract. Arrival dates can be postponed to Dec. 31, 2004, if a signed contract is presented to the Central Trust of China (CTC) before the deadline (application made to CTC from Aug. 1 to 25, 2004). Unused TRQs will be reallocated in September.
Non-TRQ Duties
Effective Jan. 1, 2002, Taiwan redefined "pork offals" to include only hocks, feet, skirt, guts (including intestines and rectum) and stomachs. Remaining pork variety meats were liberalized with WTO entry. Items such as kidneys, tails and hearts no longer require a quota and are effectively liberalized.
The out-of-quota rates for pork bellies fell to 55% in 2003 and will decline to 50% in 2004. Out-of-quota rates for pork offal are 287.5% in 2003 and will be 265% in 2004. Imports will be liberalized in 2005 and tariffs for all pork offals will go down to 15%.
Special Safeguards
Both pork bellies and pork offal are subject to a Special Safeguards (SSG) regime, based on Article 5 of the WTO Agreement on Agriculture. Under the SSG, Taiwan can add a 33% duty surcharge when import volume surge above a trigger volume or if local prices fall below a trigger price determined before WTO accession, the press release said. Taiwan has calculated its volume trigger levels at 125% of the TRQ. 2004 pork belly price trigger remains NT$30/kg. Note: SSG does NOT apply to any imports entering under a TRQ.
Although demand for pork offal is strong, the high out-of-quota duty will strongly discourage imports above the TRQ level until it ends in 2005. Lower out-of-TRQ duties make it possible but still unlikely that pork bellies will exceed SSG trigger levels in 2004. Although liberalization in 2005 could trigger SSG duties, some industry sources do not believe import demand will be strong enough to trigger a SSG response.
Sanitary Regulations
In order to export meat to Taiwan, a country's meat quarantine inspection and health certification system must be reviewed and found acceptable by the Taiwan authorities. Taiwan currently allows imports of pork/pork offal from the U.S., Australia, New Zealand, Canada, Denmark, Japan and Hungary. Finland was approved to supply pork and products on Feb. 18, 2003 but no imports have been recorded. A Dutch request to export pork to Taiwan in 2001 was rejected after a European Foot-and-mouth disease outbreak although other EU countries have applied for import permission. Korea's application for FMD free recognition was also denied in December 2001. South Korean pork offal could be potentially very competitive if allowed entry. Paraguay was also disqualified in 2002 because of FMD.
Countries not currently approved to export meat products to Taiwan must formally apply for approval. The approval process requires bilateral negotiations and on-site inspections of production and processing facilities, which can take several years to complete. FMD concerns are likely to keep competitive South Korean pork products off the Taiwan market for at least two- to-three years. Disease problems complicated by cross-strait political issues will likely keep PRC pork off the Taiwan market for an extended period.
Cross-Straits Trade and Investment
Currently Mainland Chinese pork, pork offals, and pork products are banned entry into Taiwan. Taiwan is expected to gradually relax these administrative controls, but the Mainland will still face SPS hurdles in exporting to Taiwan. Continuing animal disease problems in the PRC make exports of most animal products to Taiwan very unlikely. Even if permitted, imports from the Mainland would face other barriers such as the lack of a working relationship between China and Taiwan's quarantine services and the lack of direct shipping routes. Taiwan authorities have also banned investment by Taiwan companies in Mainland livestock and meat packing operations although there may well be covert investment in these sectors.
Marketing
Since pork meat demand in Taiwan depends so strongly on the prices of locally produced pork, export prospects for pork meat can vary greatly from year to year. When Taiwan does import, buyers prefer carcasses because U.S. cuts are different from what is used in Taiwan.
In addition, competitors sometimes give rebates disguised as "promotion," which can undermine U.S. competitiveness. Note: Offals for retail sale mostly go through wet markets rather than supermarkets.
