April 2, 2015
Vietnamese Pork: A sober look at Asia's most promising swine sector
Resembling a smaller version of China's swine sector twenty years ago, can Vietnam's government pull its hog and pork producers out of their five year slump?
By Eric J. BROOKS
An eFeedLink Hot Topic
Large, once dynamic, troubled but still hopeful. These words that best describe Vietnam's promising but beleaguered swine sector. Formerly Asia's fastest growing swine industry, Vietnamese hog and pork industry's has surprisingly decelerated, but the government ambitiously intends to restart its growth.
Impressive growth -and a big slowdown
Vietnam's potential can be seen in its relative consumption and income dynamics, which closely resemble those of its northern neighbor, China back in the late 1990s. Going from a sub $1,000 per capita income at the turn of the century to approximately US$2,000 today, Vietnam's red meat consumption was exceptionally high for a low income country -especially one with just a fraction of China's own per capita GDP.
Moreover, it must be said that while USDA statistics put Vietnamese pork production about 25% lower than Vietnamese government estimates, the results are still impressive.
From a USDA estimated 9.7kg in 1995, Vietnam's per capita pork consumption increased to 13.0kg in 2000. That is a very high red meat per capita consumption figure for a country with annual personal incomes below US$1,000 at that time. From there, per capita pork consumption jumped to 20.0kg in 2005 and 25.3kg in 2010, before levelling off at an estimated 26.3kg this year.
The deceleration implied in the above consumption figures can be seen in its pork production and consumption statistics, where the former roughly keeps pace with the latter. From 2000 to 2005, pork production increased at a 10.3% cumulative annual growth rate (CAGR), going from 1.029 million tonnes to 1.670 million tonnes.
From 2005 to 2010, pork output decelerated to a CAGR of 5.8%, increasing from 1.67 million tonnes to 2.20 million tonnes over this time. However, for the years 2010 to 2015 inclusive, output is estimated to have increased to a projected 2.45 million tonnes this year. The resulting 2% CAGR is little better than what one would expect from a mature western market.
This is not entirely the industry or even the government's fault. In Vietnam, exceptionally high feed costs at the turn of the decade coincided with a sharp economic slowdown and financial crisis. As the most expensive mass consumed meat, the resulting temporary drop in personal incomes hit Vietnam's pork demand harder than that of less expensive meat lines.
The downturn in the sector's production, demand and profitability was compounded by repeated outbreaks of PRRS (a.k.a. "blue ear disease) and foot-and-mouth disease (FMD) starting in the late 2000s and peaking around 2012. Along with the above mentioned deteriorating macroeconomic conditions and swine rearing profitability, these outbreaks both stopped hog inventory growth and discouraged farmers from replenishing herds.
Going forward, the government is not letting the last five, highly disappointing years temper its ambitions. In its new five year plan for Vietnam's swine sector, it is projecting output to grow by a whopping 11.3% per annum. Pork production, which is estimated to total 2.45 million tonnes this year, is expected to rise to 4.2 million tonnes by 2020. From today's 26kg, per capita pork consumption would rise to 42kg by 2020, or roughly the same as what China's citizens do today.
The question is, do the details of its five year plan make such a rise in production and per capita output feasible?
On one hand, the worst appears to be over for Vietnam's economy. After growing by 5.5% rate from 1986 to 2010 and at a 7% rate from 2005 to 2010, growth came to a near standstill in the late 2000s when an immature financial sector's loan books went sour. Growth resumed in late 2013 and is now on an accelerating trend -but even this has limits for the swine sector's future growth.
According to a report by McKinsey ("Taking Vietnam's Economy to the Next Level", by Marco Breu, Richard Dobbs, and Jaana Remes, February 2012), the previous five year's 7% growth rate was achieved via a 2.8% annual expansion in the labour force -but Vietnam's workforce will only grow by 0.6% per annum through to 2020. The report implies that without productivity improvements, economic growth would fall to the 4.5% to 5.0% range, and a more realistic forecast would be annual economic growth in the 5.0% to 5.5% range.
Conservatively speaking, after an approximate 1% annual population increase is factored in, a 5.0% to 5.5% economic growth rate would create scope for annual pork consumption increases of 3.5% to 6.0% --with the high upper range's growth limit also depending on the swine sector's ability to raise productivity via consolidation coinciding with improvements in technology and farm management.
The industry's unconsolidated inefficiency can be seen in MARD figures, which show that backyard farms account for 65% to 70% of Vietnam's hog inventory but only 56% to 60% of Vietnam's pork production. In an article written by Mathieu Cortyl, commercial director of Kemin Europe ("Challenges and opportunities in the pig industry", 11 February 2014), "The number of piglets weaned per sow per year is usually between 10 and 15 in small farms, but increases to more than 20 (21 to 22) in larger operations. The average weight at slaughter can be as low as 40 to 60 kg for backyard but increases to 110 kg for the commercial units. As a result, the number of kilograms of meat produced per sow per year is more than double when comparing small and large pig farms."
Such huge variations in productivity between Vietnam's largest and smallest farms imply that the country's pork consumption growth depends on rate at which the industry's scale and consolidation expands as much as it does on the economy's underlying growth rate. Given the huge scope it creates for unexpected outcomes, we prefer to make a conservative forecast.
For now, Nguyen Xuan Duong, deputy director of livestock for Vietnam's ministry of agriculture and rural development (MARD) reports that pig production was rising at a 3% annual rate in the latter half of 2014. Conservatively assuming that hog herds keep expanding at this pace and that productivity and carcass yields improve a further 3%, from 2015 to 2020, an average annual increase in Vietnam's pork production of up to 6% is feasible -but we will make more conservative assumptions.
That's because a significantly higher rate of pork supply increase can only be achieved if the government undertook radical (and unemployment causing) measures to accelerate swine rearing productivity but on the basis of the present five year plan, this cannot be assumed.
While a far cry from the government's target of flamingly optimistic hog production forecast, even a highly conservative 4.0% annual increase in pork production over the next five years based on more conservative USDA figures has impressive implications. Already Asia's second largest pork producer after China, even a USDA based 4.0% industry growth rate implies that by 2020, Vietnam's 3.1 million tonnes of annual pork production would make it the fourth largest in the world, after China, America and Brazil.
It would also leave Vietnam with 31kg of pork consumption per capita, some 30% more than the amount an average Canadian or American eats in a year, twice as much as Thais eat, and second only to China. Even then, Vietnam would have at least one or two additional decades where its pork production and consumption would grow at the same rate or faster than China's does today.
While the quantity of pork produced would rise more slowly than Vietnam's government projects, the hog sector's difficult to measure improvements in pork quality, swine rearing techniques and food safety will fuel an investment wave that by implication, creates huge opportunities for mature western pork producers and their supply chain partners.
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