March 30, 2017
Red beef and white milk, pink pork and yellow corn: Deconstructing the origin of China's meat import binge
By ERIC J. BROOKS
An eFeedLink Hot Topic
It has been the theme of our articles on Chinese feed and livestock problems are of a supply-side nature and not due to a lack of demand. Nowhere can this be seen more than in China's soaring demand for beef and its willingness to import this most expensive of red meats.
While China is too short of arable land to justify expanding its beef cattle herd, it did have something in common with India: When milk production was expanding rapidly, the dairy sector enabled it to expand beef production.
From 1.29 million head in 1990, the number of dairy cattle jumped 857% to 12.35 million by 2009. Hence, for two decades, there was no shortage of aging dairy cows eligible to be recycled into hamburgers and steaks.
By boosting the quantity of cattle culled from its once rapidly expanding dairy herd, China quadrupled beef production from 1.26 million tonnes in 1990 to 5.13 million tonnes in 2000. Whereas China has 985% more dairy cattle this year than in 1990, the total amount of beef cattle rose just 10% -versus a near eight-fold consumption increase over the same period.
In the latter half of this era, the years 2001 through 2010 saw beef production rise a much slower but still respectable 28.5%, to 6.53 million tonnes at the end of the decade. However, after growing by more than 3% annually up to the year 2008, the same post-melamine milk contamination crisis conditions that made dairy imports soar also led to a boom in Chinese beef imports.
The decade after 2008's melamine scandal saw dairy production rise marginally. With dairy cow productivity also rising, this flattened out China's formerly rapid dairy herd and with it, scope for boosting beef production.
As the accompanying chart shows, cattle inventories levelled out after 2012, forcing imports to bridge the gap between stagnant domestic supplies and booming demand. Just as was the case with milk and pork, beef consumption kept rising but domestic production flattened out, leading to a flood of imports.
As the accompanying graph shows, the rise in beef imports, while spectacular, essentially tracked a similar rise in dairy imports, and both were a by-product of levelling out dairy cattle inventories. Thus, while melamine contamination's role in undermining China's domestic dairy output is widely known, the damaged dairy sector's role in making China the world's largest beef importer is less well known.
Even so, this rising flood of beef imports is part of a larger story: Despite a sharp slowdown in economic growth, China's appetite for meat is now growing far faster than its domestic supply. Ultimately, the rising volume of red meat imports is symptomatic of China's protein production and consumption going in different directions.
In retrospect, we can state that Chinese agribusiness's inability to keep pace with protein demand started in 2007-08. In that decade's previous seven years, the country's protein production was expanding by over 6% annually, its feed production by 9%. Meat supply grew as quickly as demand. Except for soybeans, the country was self-sufficient in all major feed crops.
In 2007-08 after China experienced 100% pork hyperinflation, the government introduced costly, protectionist feed grain policies that eroded swine rearing's competitiveness. A year later, melamine contamination crippled dairy sector growth. At first, the impact on protein production was minimal but over time, feed grain protectionism undermined first hog rearing returns and later, pork production.
All this can be seen in Chinese production and trade statistics. From 2007 when the above mentioned supply-side troubles began through to 2012 (when they became chronic), total output of beef, chicken and pork decelerated to a still respectable 4.1% annually.
From a USDA estimated 60.3 million tonnes in 2007, China's total output of beef, chicken and pork jumped 22.4%, reaching 73.8 million tonnes in 2012. Buoyed by still booming broiler and aquaculture lines, feed output jumped 67.5% in five years, from 118.4 million tonnes in 2007 to an all-time high of 198.3 million tonnes in 2012.
But there was a price to be paid for the slower supply-side growth: On one hand, Chinese agribusiness did not find it profitable to expand output rapidly as before. On the other hand, China's consumers did not feel the same way.
Amid falling returns and decelerating swine and cow herd expansion, imports of beef, pork and dairy products started flooding in. With meat output's growth rate slipping from 6% in 2000-07 to 4% in 2007-12, volumes of imported beef, chicken, pork and dairy products started growing at a 13.3% annual rate during this time.
All this was followed several years later by post-2012 food safety scandals and lethal bird flu outbreaks that decimated a poultry sector that had been expected to grow faster than any other land animal line. The final blow came when the exhaustion of aquaculture frontier areas and uncontrollable shrimp disease outbreaks put its once vibrant farmed fish production into reverse.
Hence, just as swine, dairy and beef succumbed to supply-side problems in the late 2000s, so did broilers and aquaculture in the years after 2012. For two years after 2012, the combined production of beef, chicken and pork grew by an anemic 1.9% annually, reaching an all-time peak of 76.6 million tonnes in 2014.
Thereafter, with virtually every meat line challenged by one or more serious supply-side issues, the unthinkable happened: Instead of rising at anticipated 4% to 6% rates, China's protein production declined. Led by a 20% drop in broiler meat output, 2017 will close with combined beef, chicken and pork output slipping to 68.97 million tonnes. This will be a 10% drop in China's meat production over the past three years –and the first time since 2009 when its production of these protein lines has fallen below 69 million tonnes.
Overall output of beef, chicken and pork fell at a 1.3% annual rate in the five years since 2012 and at a much steeper -3.4% annual rate after protein output peaked in 2014. Whereas everyone expected its feed production to keep climbing by 4% annually, the years since 2012 have seen it fall by an average of 0.9% yearly.
But while China's once meat dynamic meat supply growth has collapsed, consumer demand for meat remains alive and well –and the only solution is a rising flood of meat imports: From 2012 through 2017 combined imports of beef chicken and pork grew at a 26.7% annual rate –and the pace accelerated to 36.1% after 2014.
What is most curious is not just the quantity of rapid meat import growth but its qualitative nature: From 2012 through 2017 inclusive, imports of inexpensive chicken grew by 16.7% annually, those of intermediately priced pork by 26.9% yearly, while beef imports skyrocketed at a whopping 61.7% annual rate.
Clearly, China defies the model of Third World meat demand growth. With its cultural proclivity for pork, it started off as a red meat eater rather than turning into one after incomes reached US$10,000/person, which is something that has not yet happened.
Moreover, while its demand for pork fluctuates with its price, it stays stubbornly high even when its cost sets price records. With its consumption more strongly concentrated among its top 10% wealth demographic, China's beef demand is even more strongly inelastic than that for pork. Beef appears to be the one meat line which will become dominated by imports before the end of the 2020s.
This is a good news/bad news type of story. On one hand, both domestic and multinational agribusiness players can rejoice that China's hunger for meat –especially red meat– appears to be bullet proof. Demand, for dairy products, pork and most especially, beef has stubbornly defied its slowing economy and just keeps increasing. Better still: High-end, high value added lines like beef and pork are seeing their demand rise the most quickly.
Going forward, with Beijing's policymakers finally making intelligent decisions to liberalize its corn market and bring feed prices back to international levels, swine rearing returns will improve. By the early 2020s when China's corn market is fully liberalized, we should see its production costs for feed-intensive pork fall to significantly lower, internationally competitive levels. It could recapture a large portion of the market segment now lost to imported pork.
But even if it fails to stop the growth of meat imports, the vast size of China's market protects it from ever being dominated by imports: Even though it buys two times more pork than second ranked importer Japan, foreign pork only makes up less than 5% of its entire consumer demand.
A similar situation is underway in its dairy market, where returns are also improving and the market is too vast to be import dominated. It will eventually split into two segments: Domestic food processors will use cheaper domestic WMP, SMP and butter in food processing whenever possible. On the other hand, a large proportion of upscale consumers will prefer imported dairy goods at the retail level.
In fact, the above statistics imply that to stop or reverse the growth in import volumes, all China must do is start expanding its overall meat production by at least 4% annually in land animal proteins and 5% across most seafood lines. With the deregulation of corn prices, the industry is getting a big boost of supply-side expansion incentive and the promise of rising returns over the next five years.
Furthermore, this explosive growth in import volumes is happening despite a slowing rate of economic growth. This demonstrates that China's meat demand enjoys more than just excellent growth potential: Despite having much pent-up growth potential, its meat consumption, particularly of high-end red meat lines, is remarkably inelastic in a downward direction but shows great potential to rise to newer, record high levels.
Neither rising unemployment nor faltering economic growth will separate China's vast population from eating a quantity of red meat: Even today, it its per capita red meat consumption is roughly on par with that of Americans and Australians –and it may yet exceed them in that regard.
The bad news is that the meat line with the healthiest consumption growth, is precisely the one which whose production is impossible for a land-scarce, overpopulated country to sustain. China's status as the world's largest beef importer is confirmed and it will import a million or more tonnes well into the future.
Broilers, the meat line with the greatest expansion potential faces the greatest supply-side and demand problems. If uncontrollable bird flu outbreaks were not enough, Chinese consumers' apparent revulsion against poultry's low status make chicken the type of meat one eats on the job, in fast food restaurants or in schools and hospitals.
Aquaculture too, seems to be suffering from farm management issues that increasingly make its long-term viability dependent on a change in the way industry approaches cost control issues.
When all this is considered, we see the following situation: Beef is too feed intensive for China's land scarce agribusiness industry to expand rapidly. Even if its dairy sector recovers its former growth momentum, beef demand will race ahead of supply for at least another five to ten years.
Similarly, with help from lower corn costs, better government regulation and subsequent minimizing of industry scandals, dairy will regain some market share from SMP and WMP imports. On the other hand, consumer segments like UHT milk and fast growing, fast-food dependent lines like cheese look set for more import dependence.
After a half decade of analysts declaring an imminent recovery, the once promising broiler sector appears to be no closer to solving its bird flu outbreak problems than it does its Chinese marketing image as a third-rate, lower class protein.
Amid all the above supply-side challenges, there is only one meat line that appears hopeful: With feed costs falling, the swine sector does not suffer from the food safety scandal, land shortage or meat marketing issues facing its other meat lines. Hence, it has the most promising long-term growth dynamics, and most potential to turn back the growing import tide, possibly from the early 2020s onward.
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