June 25, 2015
Korean beef's restructuring driven path
Consolidation driven culling thins out inventories, resulting in slumping output, rising imports.
By Eric J. BROOKS
An eFeedLink Hot Topic
Lacking domestic feed inputs and with over 50% of consumption accounted for by imports, South Korea's beef market is in a state of transition. Yielding high quality beef but feed inefficient, meat from small sized, native Hanwoo cattle costs approximately 30% to 50% more than its US or Australian competition. However, with most imported beef consumed in hotels, restaurants or institutional settings, Koreans show a marked cultural preference for eating their more expensive, higher quality beef at home.
Slaughter, output first rise, then slump
The government knows that the domestic beef cattle's sector's survival depends on consolidation and even before policymakers introduced tough new cattle farm regulations, the trend was well underway. Based on USDA figures, over 5 years, the total number of beef cattle farms in South Korea fell 31%, from 181,000 in 2008 to 124, 274 in 2013. In 2014, with a little help from policymakers, the consolidation trend underwent a noteworthy acceleration.
On one hand, newly introduced regulations regarding fumigation and ventilation are too costly for the countless backyard famers still in the industry. On the other hand, under a government program introduced in 2014, backyard farmers, many of whom are either elderly, are given a sizable cash settlement upon exiting the industry.
Consequently, 2014 saw the number of backyard farms plunge 16.4% or 20,381, or by more than half as much as in the previous five years. Hence, even though integrators are rebuilding herds and actively procuring Hanwoo bull semen, the sheer number of backyard farm closures resulted in closing cattle inventories falling for a second consecutive year, by 2.8% or 90,000 head, to 3.1 million. Overall cattle numbers are down 10.8% since their secular peak of 3.479 million in 2012 and are expected to level out in the 2.9 to 3.0 million head range in 2017.
Moreover, the downturn in beef cattle numbers was much steeper, falling 5.4% to 1.166 million head at the beginning of 2014, then dropping 3.7% to 1.123 million at the start of this year. Even among beef cattle however, these numbers hide extreme variations in the age of slaughtered animals.
Because the program that pays older, smaller farmers to immediately exit the industry was introduced without warning last year, a high proportion of slaughtered cattle were only 1 to 2 years old The population of cattle under a year old fell 2.1%, that of cattle more than two years old dropped just 1.2% –while the number of 1 to 2 year old cattle plunged an exceptionally steep 14.1%.
Interestingly, while high cattle prices are encouraging small farmers to abandon beef cattle rearing and take advantage of the government-mandated exit payout, they are also motivating larger farms to hold back many animals in order to expand their herds later. With many cattle slaughtered over the last few years and so few now available for release to market, total slaughter numbers are expected to fall another 5% in 2015.
Nevertheless, the industry is in a different state than it was three years ago, when high import volumes depressed cattle prices at a time of high feed costs. In 2012, the government attempted to firm up cattle prices by subsidizing the early slaughter of 30,000 head. This time, with the inducements to leave the industry occurring at a time of high cattle prices, it is estimated that an additional 200,000 cattle were slaughtered due the new policy over the past 1.5 years. Between these two policies, the number of cattle slaughtered jumped a whopping 42% in 2012 and 14% in 2013.
Now, with fewer cattle left to bring to market, the slaughter trend has gone into a sharp reversal. The number of slaughtered cows fell 9.9% last to 509,000 and is projected to decline another 12.4% in 2015, to 446,000 head. Because cattle have a long maturity time, with the total numb of farms expected to keep falling 5% annually, it will be several years before inventory rebuilding by integrators can overtake the decline in cattle numbers caused by farmers leaving the industry.
This in turn will impact the domestic supply of beef. At first, several years of accelerated culling resulted in beef production rising 10.3%, from 312,000 tonnes in 2012 to 344,000 tonnes in 2013. But with cattle herds thinning out, slaughter rates are now in a multi-year wind down. As a result, beef production fell 2.7% in 2014, to 335,000 tonnes, will fall 4.5% to 319,000 tonnes this year, and looks set to drop another 4.5%, to just above 305,000 tonnes in 2016.
Changing import trends
While South Korea's beef consumption is no longer growing rapidly, this drop in domestic production will force more imports in. Consumption is dropping a USDA estimated 5,000 tonnes, to 740,000 tonnes, but production is falling by far more.
After rising 4.5% to 392,000 tonnes in 2014, despite high prices limiting demand, imports are projected to increase another 4.6% this year, to 410,000 tonnes. While foreign beef accounts for slightly over half of South Korean consumption, this supply has, over the years, seen many changes and upheavals.
After going from 70% share in 2003 to zero exports for five years, US beef has staged an incomplete, but respectable recovery, though its market share appears to be topping out. It went from 0% of beef imports in 2007 to 7% in 2008 when its five year ban was lifted, and 29% in 2010. Australian beef, which accounted for up to 70% of imports when US beef was banned, has seen its import market share level off slightly above 50%. By contrast, more costly New Zealand beef lost a much greater import share to US beef.
At one point, the USDA expected American beef to total 40% of imports by this time. However, rate of market penetration is decelerating, going from 34.4% in 2013 to 36.4% in 2014. Along with regaining some of its lost market share after being banned for five years, there were other factors on the side of US beef imports which are not there anymore.
First, the turn of the decade saw the Australian dollar rise to high levels and the US dollar fall by a relative amount against it. For a while, this put many US beef cuts at virtual cost parity with their Australian competition. Second, a free trade agreement (FTA) between South Korea and the US gave it a cost advantage augmented by the aforementioned low US dollar value.
Now however, Australia's currency has fallen by nearly 30% against the US dollar since 2013. The currency cheapening of Australian beef was then augmented by a new FTA between Australia and South Korea. All this is now giving Australian beef a significant cost advantage.
According to USDA estimates, after import duties, American beef imports will cost on average 16.7% more than their Australian competition in 2014 and will cost 19% more this year. Even with Australian tariffs falling from 37.2 to 24.0% in 2019 and tariffs on US beef falling from 32% to 18.7% over the same time, unless the US dollar falls by 20% or more, it expects Australian beef's 18% to 20% cost advantage to persist.
But while imports are filling the gap created by falling production, domestic consumption is now flat, falling from 745,000 tonnes in 2014 to 740,000 tonnes this year. This is caused by the relatively high cost of beef in recent years and also due to a longer-term deceleration in demand growth.
Beef consumption per capita at first rose at a rapid 8.3% annual rate, from 5.6kg in 1990 to 12.7kg in 2000. After 2000, with the country's population only rising by 0.6% annually, per capita beef consumption only rose 1% annually over the next fourteen years, totaling 14.6kg in 2014. Between this slow growing personal consumption and meagre population growth, South Korea's beef consumption appears poised to grow 1.5% to 2.0% annually over the next five years.
Exporters will not find slow market growth a problem from now through to 2017: As domestic beef production keeps falling this year and only levels out about 18 months from now, annual demand for foreign beef will rise by 4% or more –and imports could exceed their all-time peak of 457,000 tonnes, set back in 2003.
However, when Korean cattle inventories and beef production recover later this decade, domestic suppliers will do their best to win back the market share they are losing at this time. With American and Australian beef cattle herds (and exportable surpluses) expected to coincide with a late decade rebound in domestic production, the competition in South Korea's beef market can only intensify as we approach 2020.
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