September 22, 2017
Red, white, pork and blue: Why the United States continues to dominate the world pork market
Brazil may have lower feed costs and Canada a lower dollar but pork requires intelligent farm management as much as it does cheap inputs.
By Eric J. BROOKS
An eFeedLink Hot Topic
Whereas Brazil dominates the output of most meat lines in the Americas, pork is a prominent exception: In the world pork market, Brazil is a minor player, accounting for just a tenth of world exports. By comparison, America holds a 30% world market share and Canada 16%. Outside of the Americas, even Spain (which is not known for being feed-rich) exports twice as much pork as Brazil.
Blessed with world-leading per capita endowments of feed, water, and pastureland, Brazil dominates output of beef and chicken. Intermediate in feed intensity and arable land needs, swine require significantly more fine-tuned farm management methods and sanitation protocols.
Hence, pork is dominated by producers which are not just feed rich but also technically proficient at farm management. This explains why America dominates world pork exports and Brazil does not. The fact that farm management and technical matters are as important as feed inputs were recently made clear by Brazil's recent food safety scandal.
In March, Brazilian police exposed that many processors were involved in the corrupt export of red meat that was unfit for human consumption. Leading processors including JBS and BRF bribed officials to not carry out plant inspections, approve stale meat and allow the shipping of bacteria-tainted exports. The scandal eventually caused the firing of 33 government officials and even the arrest of members of the prominent Bautista family. The latter control JBS and had dealings that even reached into the president's office.
Almost immediately, large importers including China and Hong Kong banned Brazilian pork. Compared to 2016, Brazil's March and April pork export volumes fell by 3% and 16% respectively. This was due to Hong Kong and China. Hong Kong's Brazilian pork purchases fell on-year by 27% and 41% in March respectively. China's Brazilian pork procurements similarly fell by 24% and 59% respectively.
As the government arrested those responsible, most countries quickly lifted their Brazilian pork import bans. By September, only seven nations responsible for 0.4% of Brazilian meat imports had not lifted their bans.
Even so, Brazil's January to May pork exports were 4% lower than a year earlier. Only shipments to Russia showed a 10% year-on-year increase over this time. Brazil's credibility will recover but last year's 832,000-tonne record pork export volume is unlikely to rise to a projected 900,000 tonnes. At best pork exports will roughly equal their 2016 volume.
Relative to Brazil, America's swine sector finds itself fully recovered from yesteryear's crisis. After a record 2.44 million tonnes of pork exports in 2012, hog farms were shaken by a high dollar and a nasty PEDv outbreak. Following several years of mostly profitable hog farming margins and inventory rebuilding, exports were poised to set a new record even before Brazilian pork's recent woes.
US pork export volumes from January through July inclusive increased 11% on-year, well ahead of the 8.3% increase projected by the USDA for this year. This is mostly due to NAFTA trade partner Mexico, whose pork consumption is increasing far faster than its production. It which absorbed 31% of US pork export volumes in the first half of this year. At 404,330 tonnes, H1 2017 pork exports to Mexico jumped 24.7% over the 324,242 tonnes imported in the first six months of 2016.
Value-wise however, Mexico is only the second largest US pork importer, as the US$633.9 million of US pork it bought represented 22.6% of export revenue. Japan by comparison accounts for only 22% of American pork export volume but the expensive cuts it purchases amount to 29.6% of US pork export value.
Though it is a relatively mature, stagnant market, Japan's imports of US pork continue to exceed expectations. Whereas the USDA projects total Japanese pork imports to fall 1% this year, the country's H1 2017 purchases of American pork rose 4.7% by volume, totaling 285,574 tonnes, compared to 272,575 tonnes in the same period of 2016.
Stimulated by rising growing pork consumption and a free trade agreement's falling import tariffs, H1 2017 exports to South Korea jumped 33.2% to 131,304 tonnes (compared to 98,595 tonnes in H1 2016). That is much higher than the 15,000 tonnes, 2.4% increase in overall South Korean import volumes projected for this year. Finally, the disruption of Brazil's pork trade caused its pork exports to Hong Kong to fall 31%, it helped boost US exports to that destination to 35,000 tonnes in the first six months of this year (compared to 31,942 tonnes in H1 2016).
With four destinations that absorb over two-thirds of US pork exports increasing their purchase volumes a collective 15%, it will be a banner year for America's swine trade. Rabobank projects a 10% export increase, to a record 2.61 million tonnes. Over the short-term, we can expect pork production to slow down: With prices plunging from US$80/head in the first half of the year to below US$60/head at the time of publication, margins are now near zero or even slightly negative.
Alongside US hog farming's world-leading productivity, many other factors support higher US production, particularly exports, which now amount to 27% of output. Several pork processing plants slated to open in 2018 are expected to greatly increase pork processing capacity, which has been strained in recent years.
These include a joint venture between Seaboard Foods and Triumph Foods in Sioux City, Iowa with the capacity to process 3 million head of swine yearly. To the east, a plant with the capacity to slaughter 3.5 million hogs annually is opening Coldwater, Michigan by H2 2018. Prestage Farms is looking for a Midwestern location to construct a 3.5 million head/year pork processing plant with a proposed 2019 opening.
Several smaller processors are currently modernizing older beef and pork processing plants capable of collectively adding 14.0 million head of annual slaughtering capacity. Noting that America finds itself short of processing capacity, Rabobank's Q2 Pork Quarterly estimates that plants under construction could boost pork processing capacity by 7% --and 10% when other proposed projects come on stream.
One side-effect of these capacity increases will be to boost imports of hogs from Canada. Rather than boost capacity, the number two pork exporter has closed several processing plants in recent years. Boxed in by falling per capita consumption in Canada itself, low returns and competition from EU suppliers, Canadian pork exports are growing more slowly than their US or Brazilian competition.
Since 2010, Canadian pork export volumes have risen 25%, compared to a 36% rise in US shipments and 37% in Brazilian exports over this same period. This occurred even though the Canadian dollar has fallen from equality with the US dollar at the turn of the decade to 20% to 30% below parity since 2013. -In retrospect, Canada's aggressive pork export growth occurred during fifteen long years when the Canadian dollar was mostly between 60 and 70 cents US -a situation that will not occur anytime soon.
From over 2/3rd of pork exports twenty years ago, America now only buys 33% of Canada's pork exports. Unfortunately, the Asian nations Canada diversified its pork shipments into are precisely the ones being flooded with surplus EU pork and Brazilian supplies, with the latter being cheapened by a currency devaluation in excess of 50%. Even in places like South Korea where Canadian pork once had a clear market advantage, the country went on to sign an FTA with the US, resulting in intensified competition from the latter.
Moreover, while America's domestic market helped absorb pork blocked by PEDv export bans, Canada's far more limited pork consumption offers no such assistance. With beef prices crashing back to earth, the USDA expects Canada's per capita pork consumption to fall from 29.1kg in 2015 to 21kg in 2018.
This leaves an incrementally increasing Canadian pork supply squeezed between falling domestic consumption and slack export growth. US pork enjoys higher stable domestic consumption and NAFTA-sheltered markets access that is protected from European and Brazilian competition. Recent scandals notwithstanding, Brazil enjoys lower feed costs and an undervalued currency. Hence, while Canada will remain the number two pork exporter, it will feel Brazil catching up from behind while the US export machine widens the distance between itself and its competitors.
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