April 12, 2018
Winners, losers and misunderstood turmoil in the world pork trade
With top importers boosting output, production is growing two times faster than exports. It is this -and not import barriers - that is slowing down the world pork trade.
By Eric J. Brooks
An eFeedLink Hot Topic
With the consumption of leading pork consumers decelerating, so is world pork production. Consumption is rising 2.3% or a USDA estimated 2.53 million tonnes (to 113.03 million tonnes), from 110.50 million tonnes in 2017. That is stimulating a 2.3% rise in world pork production, from 2017's 110.93 million tonnes, to 113.46 million tonnes.
On the other hand, at a USDA estimated 8.341 million tonnes, 2018 world pork exports will be a mere 0.7% above last year's level and shade below 2016's all-time high of 8.35 million tonnes. -This is a break from recent years, when pork exports expanded at a near 6% rate. Pork production is now expanding twice as fast as its world swine meat market. What exactly caused this sudden seizing up of growth in the world pork trade?
Winners: America & Europe
While it generated waves of publicity in mainstream media, China's 25% tariff on US pork will not have any great impact on the overall world pork trade. According to a Rabobank study ("If China Strikes Back: Potential Implications for US Food & Agribusiness", RaboResearch March 2018), "US pork exports to China [not including Hong Kong] could decline to 120,000 tonnes in 2018, down from our baseline estimated of 300,000 tonnes."
That's a large 60% drop in US pork exports to China from what was expected. America's 180,000 tonnes of lost market share will be divided up by exporters in Spain, Germany, Denmark, Netherlands and Canada, all of whom will export 10,000 to 50,000 tonnes more pork to China than initially estimated.
This is a godsend for EU producers, whose export market share had been under attack. Previously, 2014's loss of several hundred thousand tonnes of EU exports once shipped to Russia was more than counterbalanced by China.
Chinese pork import demand tripled from 0.76 million tonnes in 2014 to nearly 2.2 million tonnes in 2016. Coinciding with a steep devaluation of the Euro, that caused EU pork exports to surge 45%, from 2.16 million tonnes in 2014 to 3.13 million tonnes in 2016. Alongside China's 1.5 million increase in pork import volumes over two years, the low Euro made it possible for EU pork to boost their share of East Asian markets such as South Korea, Singapore and Japan.
After late 2016 however, falling Chinese demand for imported pork coincided with a 15% rise in the Euro's value against the US dollar. Facing both lower Chinese import demand and plentiful supplies of cheaper US pork, EU pork exports fell 8.6%, from 3.125 million tonnes in 2016 to 2.857 million tonnes last year.
They had been expected to fall another 2% to 2.80 million tonnes in 2018 -until China made US pork 25% more expensive. 2018 European pork exports are now expected to stabilize and total 2.9 million tonnes, 1.5% more than they shipped in 2017. It is also 100,000 tonnes and 3.6% more than how much the EU would have exported had the US not provoked China into taxing American pork. While no EU country exports more to non-EU countries than America or Canada, this makes the European Economic zone the single largest supplier of pork to the world market. It remains a far more important world supplier of pork than it was five years ago.
Interestingly, while Europe is a clear winner in today's fast-changing world pork market, so too is America. It was already in a winning position prior to China's imposition of a 25% import tax. The 180,000 tonnes of pork it would have exported to China totaled just 1.5% of its output, 6.7% and less than 10% of the total volume of pork America ships annually to Mexico, Japan, Canada and South Korea.
The blow is further cushioned by Hong Kong, which has long been used to smuggle exported goods into China. Before China's 25% tariff, exports to Hong Kong were expected to fall 8.2% from 2017's 463,000 tonnes to 400,000 tonnes this year. With the new import creating motivating the smuggling of US pork into China, exports to Hong Kong are now forecast to increase to 500,000 tonnes, 8% or 37,000 tonnes more than what was shipped there in 2017.
Some US pork initially destined for China is also expected to find buyers in NAFTA trading partners Mexico and Canada and East Asian countries such as Philippines, South Korea, and Japan. All this is expected to partly offset the sharp decline in shipments to China.
As a result, instead of expanding 5.9% from 2.555 million tonnes in 2017 to 2.706 million tonnes, 2018 exports will rise only 2%, to around 2.606 million tonnes. While this is 100,000 tonnes less than was projected, it is hardly tragic for the world's leading pork exporting nation.
Between higher export demand in other countries and higher US pork consumption, US pork production will rise to 4.8%, from 2017's 11.61 million tonnes to 12.166 million tonnes this year -just 22,000 tonnes or 0.2% less than the 5% increase to 12.188 million tonnes originally forecast.
Only US pork's short-term profitability will be strongly impacted: Rabobank concluded that "cut out values may have to come down US$10/head to US$15/head, at least over the short run." Rabobank's estimated 9% to 13% tariff-induced price drop is slightly steeper than the 9% fall projected by the USDA. The resulting short-term drop in US hog farming profits will put the brakes on its rapid herd expansion. Thereafter, tighter supplies should make for a rebound in American swine prices sometime in late 2018 or early next year.
Thus, despite the blow of China's heavy import tariff, America still has a winning hand in the world pork trade. With 21% of its pork output exported, America's vast size market shields domestic producers from supply shocks such as China's 25% import tariff. Not only does it have some of the most cost-efficient pork production in the world but US pork consumption, herd size and pork production have been far more elastic and faster growing than one would expect in such a large, mature economy.
Losers: Brazil and Canada
The bad news is that despite the relatively benign, muted impact of China's tariff on US pork, the world pork trade is stagnating. After growing by an average of 4.6% annually from 2010 (6.032 million tonens] through 2017 (8.217 million tonnes), world pork exports will only rise a mere 0.8% this year, to 8.341 million tonnes.
From 2016 through the end of 2018 inclusive, leading importers China (+1.66 million tonnes) and Russia (+180,000 tonnes) increased their collective pork production by 1.84 million tonnes. As a result, China's pork imports will have fallen 30% in two years, from 2.181 million tonnes in 2016 to a USDA estimated 1.525 million tonnes this year. Russia's fell from 375,000 tonnes in 2017 to 200,000 tonnes this year.
With Russia and China's collective pork import demand falling by more than 800,000 tonnes in two years, pork import growth in the rest of the world can barely make up for the sharp fall in Chinese and Russian purchases. China's declining demand and new import tariff will intensify competition between North American and EU producers. Canada, Germany, Spain and Denmark will try to fill avoid an outright decline in their exports to China by trying to seize America's lost market share.
Of these countries, Canada is the most disadvantaged. While it has a good reputation for quality, a combination of falling domestic consumption and poor farming returns have long made for near flat pork production and small, nominal increases in pork exports.
Boxed in by poorer pork rearing returns than its US neighbor, the closing down of hog slaughtering plants, Canada finds itself in an odd position: The number two pork producer's production capacity is too small, too inelastic and not profitable enough to take advantage of America's pork trade woes.
Nor are these new problems: Since reaching 1.08 million tonnes in 2005, Canada's pork exports have grown by only 1.5% annually. Over this same time, US pork exports more than doubled while those from the EU nearly tripled.
Despite Canada's woes, Brazil finds itself the biggest loser in this year's world pork market: Rising Russian output coincided with the banning of Brazilian imports. This happened after ractopamine, which is banned in Russia, was found in Brazilian pork shipments. It also came shortly after an internationally publicized scandal where it was exposed that Brazilian customs officials and meat inspectors were routinely bribed into letting rotten meat be approved for export.
Brazil's ban was fine by Russia, which enjoys rapidly rising domestic production and was seeking to substitute domestic supplies in place of imported pork anyway. It was however, a major setback for Brazil, which accounted for a majority of foreign supplies after 2014, when EU and North American pork were banned. It was however, a disaster for Brazilian pork, which previously sent a third of its exports to Russia.
--And Brazil has no one to blame but itself for its predicament. Its agreement with Russia clearly stipulates that it was to supply pork from pigs raised without ractopamine. -And it managed to break this promise even after the world learned that its meat inspectors could be bribed into approving rotten meat for export.
From a record 832,000 tonnes in 2016 and 786,000 tonnes last year (when Russia's ban was enacted) Brazilian pork exports are slumping back to 625,000 tonnes -18% below its secular peak of 761,000 tonnes achieved in 2005. As a result of this and previous scandals that got it pork banned from places like the EU, Brazil's share of the world pork market has fallen from 15.3% in 2005 to a USDA estimated 7.5% this year.
Going forward, we may see several slow years of export growth going into 2020. With China on track to enjoy a long-term decline in feed corn costs, its domestic pork production will keep pace with demand, limiting the scope for import volumes to rise back to 2 million tonnes or more. East Asia's demand for imported pork appears to be the new growth frontier and it is a market that will be carved up by producers in America, who will be vying for market share against rivals in Canada, Spain, Germany and Denmark.
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