May 23, 2017
A boom year for America's Mexico-connected swine sector
Good returns, strong demand growth and booming exports –except that all trade growth is happening with Mexico.
By ERIC J. BROOKS
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Powered by strong domestic consumption, growing export demand and year of profit-margin driven herd growth, 2017 looks to be a banner year for America's swine sector. Hog prices are far off their 2014 record highs, trading in the same US$66 /head to US$80/head price range as ten years ago. Fortunately, feed costs are nearly a third lower today than they were back then, thereby boosting profit margins.
Alongside lower unit costs and higher productivity, it has made for good profit margins, giving an incentive to expand output. On one hand, a revised 2.2% expansion in domestic consumption from 2016's 9.477 million tonnes to 9.688 in 2017 looks smaller than expected.
On the other hand, exports are projected to boom, rising a projected 8.3%, from 2.374 million tonnes to 2.572 million tonnes this year. That is helping power a projected 5% increase in output, from 2016's 11.319 million tonnes to an estimated 11.884 million tonnes this year.
Moreover, early statistics imply that both the production and output targets are likely to be exceeded. The USDA reports that Q1 2017 pork exports increased 19% by volume and 24% by value over the same period of 2016, totaling 442,000 tonnes.
The surge was powered by large shipment increases of 37% to Mexico (totaling 161,800 tonnes), 32% to South Korea (47,600 tonnes) and 23% to Canada (25,500 tonnes) respectively. No country is in a better geographic position to supply NAFTA trade partner Mexico, which had become the world's whose estimated 1.1 million tonnes of pork imports makes it the third largest swine meat buyer after China and Japan. It also reflects the impact of a free trade agreement signed between America and South Korea several years ago, which is pulling down import duties on US pork.
If only a fraction of the current export momentum is maintained, the USDA will probably need to revise its export forecast to 10% export growth, which could total well over 2.6 million tonnes. By absorbing 23% of output, swine is now even more export driven than the traditionally trade driven broiler sector, which usually exports 20% of its output. With domestic demand showing signs of unexpected strength, this year's production could total 12 million tonnes for the first time, with output rising a faster than expected 6%.
At the same time however, US pork is facing intensified challenges with respect to its trade standing. This can be seen in America's Q1 2017 pork exports to China. Defying the overall export boom, they fell 14.3%, from 41,600 tonnes in Q1 2016 to 35,600 tonnes in the first three months of this year.
This reflects European pork's successful penetration of China's market. Whereas America supplied China with over 80% of its pork imports ten years ago, it now supplies around a tenth. Alongside Brazil, European nations such as Spain, Germany and Denmark now supply over 80% of China's pork imports. This is as much due European pork's high quality and increasingly favorable price as it is due to political friction between America and China, which is taking a toll on its meat exports.
It is mostly because of surging European pork exports into Asia and especially China, that America's share of the world pork market has fallen from 39% in 2008 to 29% in 2016. Europe's share by comparison increased from 25% to 38% in 2016.
The good news is that Europe's pork trade surge is already starting to top out: With Europe's own demand growing incrementally and its hog population falling, a higher proportion of pork from exporters like Spain and Denmark will be flow to fellow EU members. From the 13% average annual increase of the previous four years, EU pork exports are rising by 5.5% this year and will do so by less in years to come.
In fact, the US export surge is to some extent filling the market vacuum caused by the slowdown in EU pork shipments to Asia. Over the long-term, it would not be surprising if US pork's world market share partly recovered to about 33% and the EU's share fell to nearly the same amount.
The bad news is that while it will certainly remain the top pork exporting nation, US pork exports are becoming dangerously dependent on its NAFTA trade partner Mexico. In 2000, 51% of US pork exports went to Mexico. Thereafter, the amount of pork exported to Asia surged and by 2008, only 19% of the record 2.1 million tonnes of pork America exported went to Mexico.
Thereafter, with Mexican pork consumption surging ahead of its domestic consumption, US pork exports to Mexico surged, doubling to over 850,000 tonnes by 2016. Japan was traditionally the largest buyer of US pork. Mexico overtook Japan in US pork import purchases in 2012 and now buys approximately 60% more pork from America than the Japanese do. Consequently, by 2016, Mexico's share of US pork exports had surged back to 36%.
While Mexican demand has been a blessing for US pork, it is also hiding some growing trade weakness. While US pork export volumes grew 12.5% from 2008 through 2016 inclusive, the entire increase in exports is due to higher shipments going to Mexico. Japan, Canada and South Korea are all buying the same or less US pork than they did five to ten years ago. China has seen its annual pork import volume jump ten-fold in ten years but gave this additional 2 million tonnes of annual pork demand away to European, Canadian and Brazilian suppliers.
Unlike its rival exporters, the US is selling no more pork to China, Japan or South Korea than it did at the turn of the decade. To a certain extent, this is the fault of a high US dollar which is not in the industry's control. Moreover, America's free trade agreement with South Korea and growing northeast Asia demand for pork should see a resumption of some growth in US pork exports to Asia.
Even so, it is not good for US pork to be so dependent on Mexico at a time when its government is considering tearing up or modifying the NAFTA trade agreement. If American pork does not want to go the way of Canadian red meat, it needs to market itself more successfully in large Far Eastern markets.
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