February 11, 2004
Korea's Beef, Pork Market Review and Outlook
Section I: Situation and Outlook
News of the detection of one BSE case in Washington State on December 23, 2003, along with the Korean outbreak of avian influenza in late 2003, have changed the entire Korean meat market situation in 2004. The import ban on U.S. beef and beef products put into place after the BSE case drastically reduced consumption of beef, regardless of origin. The ban on beef and constant press coverage of the Avian Influenza outbreaks in Asia has created negative consumer perceptions about the safety of beef and poultry. Consequently, consumers reduced beef and poultry consumption and increased consumption of pork and fishery products. Since news of the BSE case and Avian Influenza outbreaks arrived at the end of 2003, there was no major impact on the market situation in 2003. There will, however, be a definitely impact on the 2004 market situation.
Prior to the BSE case, lucrative Hanwoo live cattle prices were encouraging farmers to expand herds in 2003. The inventory rose 2.3 percent in 2003 as farmers build herds to capture additional profits. Hanwoo steer prices averaged US$ 3,300 per 500 Kg (live weight) in 2003. The average profit for a finished steer in 2003 was 1.2 million won (over US$ 1,000). Government polices aimed at spurring Hanwoo production, such as the financial support provided for cows giving birth to more than 3 calves, have also attributed to increased inventory.
In 2003, Hanwoo beef consumption continued at strong levels despite the sluggish domestic economy and prices 4.5 times higher than imported beef. Hanwoo products target the high-income consumer market. However, the majority of Korean beef demand was satisfied with reasonably priced but high quality imported beef. Higher prices for imported beef and concerns about the Korean economy prompted a decline in beef consumption in 2003. Even if the economy picks up in 2004, beef consumption is expected to decline further in 2004 in response to consumer reluctance to consume beef due to food safety concerns.
2003 marked the arrival of the first shipment of U.S. feeder calves (762 head) since Korea liberalized the market on January 1, 2001. The calves arrived in October 2003. However, Bluetongue antibodies were detected in 8 of the cattle, which were subsequently slaughtered and incinerated. The rest of the shipment was subjected to a quarantine extension of 40 days. The remaining 754 head were released from quarantine in December 2003. Due to the BSE case in the United States, the U.S. feeder cattle will be tested for BSE when they are slaughtered. Australia exported 2,492 head of Black Angus feeder calves to Korea in 2003.
Korea is also currently maintaining bans on both U.S. and Canadian beef. It is unclear when the Korean government will lift either of the BSE-related bans. Korea will likely defer any decisions on the ban until they have dispatched a technical team to the United States to review and validate the findings of the International Review Commission. Korean officials may prefer to defer any decisions on the ban until after the National Assembly elections are held on April 15, 2004. Korean officials have noted that the World Animal Health Organization (OIE) will meet in May 2004 for discussions on BSE, which could represent another element the Korean government could use to support any decisions made on the ban. Given the aforementioned events, which are likely influencing the Korean government's decision-making process, Post has adjusted the estimates in this report based on an assumption that some easing of the ban will occur before the middle of 2004.
Consumer concern over the safety of beef will be the major barrier in restoring beef consumption compounded by the sluggish economic situation. According to a consumer survey conducted by the Korea Rural Economic Institute on January 16, 2004, 87.4 percent of survey respondents indicated they were concerned about the safety of U.S. beef while only 4.2 percent said it was safe. The survey results also indicated that only 20.2 percent of respondents had confidence in the accuracy of Korea's mandatory country of origin labeling (COOL) program. Reports of retailers intentionally mislabeling U.S. beef as domestic beef multiplied after Korea instituted a ban on U.S. beef imports. The lack of confidence in Korea's COOL program and media-driven concern about beef consumption in general have negatively impacted consumer demand for all beef including non-U.S. beef from Australian and Korean Hanwoo cattle. Among the consumers that were surveyed, 66.6 percent replied that Australian beef was unsafe and 34.6 percent replied that Hanwoo beef was unsafe.
A survey of consumers was conducted on January 16 to evaluate changes in meat consumption during the Lunar New Year holiday (Jan. 21-25). Using an index with 2003 consumption equal to 100, consumers were asked to estimate their meat consumption plans for the Lunar New Year, which is one of Korea's two largest holidays and a peak meat consumption time. Consumers indicated that they planned to consume fish (112.8), pork (77.5), Hanwoo beef (75.1), chicken (34.8) and imported beef (9.8). Among the respondents to the survey, 67.6 percent indicated that they reduced consumption of imported beef after hearing the news about the BSE case in United States. Thirty-two percent replied that they had not changed their consumption pattern and 0.2 percent replied that they increased their consumption after the news.
A vaccination program to control classical swine fever has eliminated hopes of resuming pork exports to Japan after a two-year ban due to the outbreak of FMD in March 2000. Korea will try to export pork to Japan produced from swine farms on a remote island in early 2004. In the meantime, Korean swine producers will enjoy a prosperous market in 2004 as a result of BSE and avian influenza situations that have reduced consumption of beef and poultry products.
Section II: Cattle, Beef, and Veal
Production
The national Hanwoo beef cattle herd has begun to recover after reaching its lowest level in March 2003. Despite a sluggish economy, high farm gate prices of ready-to-slaughter cattle coupled with record high calf prices have caused producers to retain heifers and stop inventory contraction. However, consumers' hesitation to consume beef after the BSE case in the United States is expected to dampen the inventory recovery somewhat in 2004. Depending on when the ban on U.S. beef is lifted, there is a possibility of another round of herd contraction if Hanwoo beef prices plunge after U.S. beef returns to the market. However, the fact that Hanwoo continues to be consumed even though Hanwoo beef retail prices are 4.5 times higher than imported beef indicates that the majority of domestic consumers that were likely to switch have switched to imported beef. Fifty-four percent of consumers surveyed in January 2004 thought Hanwoo beef was safe while 87 percent held the opinion that U.S. beef was unsafe indicating that some consumers will return to Hanwoo beef consumption. Extremely high calf prices make it risky for farmers that procure Hanwoo calves for feeding purposes. This trend is expected to continue as farmers build cow inventories in 2004 through increased retention of cows and heifers and lower cow slaughter levels.
Government programs continue to encourage more beef production. The basic policy for the livestock industry in 2004 is aimed at providing higher-quality, safe livestock products that will meet the consumer demand. Also, efforts are being targeted at differentiating the market between imported products and domestic products.
The first shipment of U.S. feeder calves (762 head) since Korea liberalized the market on January 1, 2001 arrived in October 2003. However, detection of Bluetongue antibodies in 8 of the cattle in the shipment resulted in a quarantine extension of 40 days. The cattle that tested positive for Bluetongue antibodies were slaughtered and incinerated. Activist farm groups pressured the Korean government to immediately slaughter the entire shipment of U.S. feeder cattle after hearing the announcement that BSE had been detected in the United States. However, the Korean government did not accept this request. Instead, the Korean government plans to conduct BSE tests on the remaining cattle imported from the United States after they are fattened and slaughtered. Despite indications from the Korean government that the U.S. feeders are safe, protests by domestic producers forced the importer to take back 153 head of U.S. cattle that had initially been sent to farms in the Nahjoo area for feeding.
Another prospective cattle importer that was in the process of preparing to import around 500 head from the United States shelved his plans after the BSE case. Australia exported 2,492 head of Black Angus feeder steers in 2003. Another shipment of 842 head of crossbred Angus steers from Australia arrived in Korea on January 16, 2004. Korean farmers are also protesting against the latest shipment of Australian calves as they are released from quarantine and sent to feedlots.
MAF has implemented the following initiatives to provide higher-quality, safe livestock products that will meet the demand of consumers in 2004:
Cash Incentives for Quality Improvement: This program is designed to improve the quality of Hanwoo beef by providing support (100,000 - 200,000 won or $85 - 170 per head) toward castration of Hanwoo bull calves. This program was terminated on June 30, 2003. As a follow-up to this program, as of July 1, 2004, castrated Hanwoo steers that receive "Grade A" after slaughter will receive a cash incentive amounting to 200,000 - 300,000 won per head ($170 - $255). The cash amount for 'Class A' grade dairy and crossbred steers that were castrated will be 100,000 won per head ($85). Only cattle that were born in Korea are eligible for the incentive payment.
Direct Payments for Environment Friendly Livestock Farming: This program will be enforced on a trial basis in 2004. It will provide support of 10 million won ($8,500) per farm for a total of 1,000 farms. In order to receive the payment, farms must participate in environment friendly livestock farming such as securing land for feedstuffs, returning manure to the land, etc.
Mandatory Livestock Registration: The Ministry of Agriculture & Forestry has also announced plans to require livestock farmers to register with the municipal/provincial government. To register, farmers will be required to maintain a minimum farm space per animal and undergo education on environmentally friendly agriculture once a year. Hanwoo farms larger than 300 square meters are required to register by the end of 2005. When the registration is completed, the government will have a better database for controlling livestock diseases, targeting support and enforcing prerequisites for obtaining support.
Mandatory Record Keeping of Livestock Sales: Farmers will be required to maintain records of livestock purchase/sales from the first half of 2004.
Improvement of BSE Monitoring System: Korea randomly tests 1000 head of cattle per year under a BSE monitoring program. Cattle tested under the monitoring program are allowed to move into the market before the test results become available. In addition to the animals tested for BSE on a monitoring basis, all cattle exhibiting suspicious signs are required to undergo testing for BSE. The animals subject to the mandatory test are not allowed to enter the market until the test result becomes available.
Beef Imports
The beef import estimate for 2003 was adjusted to reflect roughly 1,000 container loads of meat in the pipeline that were stranded by Korea's ban following the BSE case in the United States on December 23, 2003. Even though 2003 ended one week after the ban was implemented, the impact on actual imports was significant because importers were stocking up for the upcoming New Year (and Lunar New Year) holidays.
Since the United States accounted for 68 percent of the total imported beef market, the likelihood of Australia and New Zealand filling the gap immediately is unlikely. In addition to supply constraints in Australian and New Zealand, other countries such as Japan are also bidding against Korea to secure beef supplies. Korean demand for grass-fed beef is much lower than for grain-fed beef. Overall demand for beef has retracted in response to the negative media coverage.
As discussed in detail in the previous section, Post estimates in this report reflect an assumption that some easing of the beef import ban will occur by the middle of 2004. Even if this assumption becomes reality, reduced demand for beef driven by negative media reporting will likely result in anemic imports initially compared to pre-ban imports. Imports from the United States during the first six months of 2003 amounted to 106,539 MT (PWE), compared to an estimate of 103,000 MT (PWE) during the second half of 2003. However, the level of imported beef being sold through retail outlets (which normally accounts for about 60 percent of all beef purchases) is currently only 10-20 percent of normal sales levels. The HRI sector (which normally accounts for around 30 percent of beef consumption) is also sluggish at 60 - 70 percent of normal sales levels. The remaining 10 percent of the market is represented by meat processors.
Media coverage of any easing of the ban will likely be negative. Consequently, the positive impact on demand resulting from a Korean government decision to ease the ban could be overshadowed by negative press about such a decision. These factors were considered in projecting total imports and imports of U.S. beef in 2004. Post projects that total import will decline from 367,000 MT to 250,000 MT (CWE) in 2004 of which Post project 50,000 MT from the United States.
Consumption/Utilization/Stocks
Despite the sluggish economic situation, those who can afford to pay for Hanwoo beef have not changed their consumption pattern. The price of Hanwoo beef is 4.5 times more than imported beef. Hanwoo products target the high-income consumer market. Most of the growth in the beef market was filled with reasonably priced but high quality imported beef. In contrast to consumers of Hanwoo beef, consumers of imported beef are much more likely to adjust consumption in response to the economic situation. Consequently, the sluggish economy in 2003 negatively impacted consumption of imported beef. Even if the economy picks up in 2004 and demand received the typical election season boost in April, beef consumption is expected to drop further in 2004 because of negative consumer perceptions about beef stemming from the BSE case in the United States.
Based on consumption patterns following past food scares, consumption typically shows no signs of recovery until at least 1 month after the initial reports of a food scare. During the major BSE outbreak in the United Kingdom, Korean beef consumption dropped 4.7 percent. Using these factors as guides Post projects a 10 percent drop in 2004 beef consumption. In contrast to the drop in consumption caused by the U.K. outbreak, a larger drop in consumption is expected in response to the U.S. case because Korea did not import beef from Britain while 68 percent of all imported beef came from the United States in 2003.
Major international suppliers continued to carry out market promotion activities in 2003. USMEF conducted 10-day promotional campaigns on chilled U.S. Choice/Prime Beef at major retail outlets throughout the year. USMEF conducts such promotions monthly in 50-60 retail outlets. In addition, the first promotion of Certified Angus Beef was conducted on November 13, 2003, by a major discount store. After the BSE case in the United States, the Australian Meat & Livestock Corporation began a promotional campaign for "Clean & Safe Australian Beef - Raised Fully through Grazing" at the retail level. New Zealand is emphasizing similar promotional approaches.
The conversion factor used for converting carcass to boneless weight is 1.25 for pork and 1.36 for beef.
Section III: Swine and Pork
The Korean government's decision to vaccinate swine against classical swine fever (CSF) has eliminated Korean pork producers' hopes of resuming exports to Japan anytime in the near future. The Japanese government requires the exporting countries have not cases of CSF for one year from the last vaccination. The CSF vaccination program is still underway as of February 2004. Therefore, pork exports to Japan from the Korean mainland will be precluded throughout 2004. However, Korea has requested that Japan regionalize its policy on Korean pork exports by allowing shipments from Jeju Island where no CSF outbreaks have been detected and no CSF vaccination program has been conducted. Jeju Island is not expected be able to export pork to Japan until the spring of 2004 at the earliest pending negotiation of a protocol between Korea and Japan. Small amounts of Korean pork will likely continue to be exported to Russia and the Philippines.
Pork production intended to supply the export market prior to disease outbreaks ended up in stocks and was carried over into 2003. However, aggressive promotional activities by the Korean Swine Association to increase the consumption of unpopular cuts are being aired on television and radio programs. Broadcast promotions along with advertisements in newspapers and subway trains seem to be eliciting results as the stock level has begun to subside. The simultaneous cases of BSE and avian influenza at the end of 2003 will accelerate the tightening of pork stocks in 2004 as consumers turn to pork and fish instead of beef and poultry. A survey conducted by the U.S. Meat Export Federation in August 2003 revealed that 79 percent of consumers purchase pork at least once a week, which is higher than beef (56%) or poultry (42%). The frequency of pork purchases will increase after the BSE case and AI outbreak.
Although mainland producers cannot export pork to Japan, herd size is projected to increase modestly to meet demand for popular cuts such as pork bellies, Boston butts and short ribs. Increased demand for beef and poultry substitutes is expected to also encourage herd expansion. The decision by the Korean government on when to lift the import ban placed on U.S. beef will also influence pork consumption levels in 2004. Even with high inventory levels, the shortage in popular cuts will make it necessary for Korea to continue to import specialty cuts, such as pork bellies and Boston butts.
The Ministry of Agriculture & Forestry (MAF) plans to assist the swine farmers by developing new export markets, such as Philippines, Mongolia, etc. MAF plans to send promotional teams to these new markets and provide incentives to exporting firms. Other assistance to the swine sector in 2004 includes the following programs some of which also encompass the cattle sector:
Support for Branded Pork: The government plans to increase the total amount of pork that is marketed under a brand name from the current level of 52 percent to 70 percent.
Direct Payments for Environment Friendly Livestock Farming: See details in Section II.
Mandatory Livestock Registration: See details in Section II.
Mandatory Record Keeping of Livestock Sales: See details in Section II.
The conversion factors used for converting a carcass to a boneless weight are 1.25 for pork, 1.36 for beef.
Source: USDA
