November 12, 2014
Australian pork: Upmarket quality, down-market weaknesses and a need for import substitution
With high costs and import penetration undermining its superior quality, the solidifying of Australian pork's trade position must begin in its home market.
by Rick ALBERTO, with additional contributions by Eric J. BROOKS
An eFeedLink Hot Topic
Australian pigs are known for being the healthiest in the world. Free from diseases like PEDv, which has decimated swine herds in North America, South Korea and Japan. Australian pigs also are said to be not infected with the Trichinella spiralis, a parasite that infect humans with trichinosis, a parasitic disease caused by eating raw or undercooked pork.
These upmarket tendencies did not come about by accident and it continues to research new swine rearing technologies, along with practices that improve pig welfare. For example, Australia is undertaking the voluntary phase-out of sow gestation stalls by 2017 and is first country in the world to voluntarily do so. In contrast, Canada plans to phase out the use of sow stalls completely only in 2024.
Moreover, this movement away from gestation stalls is proceeding ahead of schedule. According to Australian Pork Limited (APL), in its 2013-2014 Annual Report, at least 63% of sows as of June 30, 2014, have moved to "gestation stall free" status, meaning the sows are loose-housed for a minimum of 90% of their pregnancy.
Only 10% exported, a net pork importer
And yet, despite Australia's clean, high quality reputation, the country exports only about 10% of the pork it produces annually, mostly to traditional destinations like Singapore and New Zealand. To Australia's credit, its pork is ubiquitous in both Singaporean and New Zealand markets, and has an excellent reputation for quality.
The only problem is that both these countries have fewer than ten million people and are mature economies with slow growing meat consumption. By comparison, developing Asian economies like Vietnam and China have anywhere from 100 million to 1 billion people and skyrocketing pork consumption.
Compared to Australia, Canada has a comparable population, geographic size and resource endowment but exports over 60% of the pork it produces. Although Canada has a huge advantage of enjoying easy access to the US market next door, 70% of Canada pork exports go to fast growing Asian countries like China, Philippines-and also to mature but large, wealthy markets such as Japan and South Korea. Australia's pork producers, by comparison, seem to have missed the boat.
Moreover, Canada is the seventh largest pork producer and second largest exporter, producing a USDA estimated 1.8 million tonnes, to Australia's 0.365 million tonnes. With Australia's domestic market stagnant, growth can only come through exports or, at the very least, import substitution.
APL chairman Enzo Allara AM has stressed the need to increase export volumes "if the industry is to continue to grow." He said the industry was trying to gain access to China, pointing out that "our first challenge is to address this issue."
Higher export volumes would, at the very least, help balance Australian pork's highly skewered terms of trade. According to the USDA, domestic output of 0.365 million tonnes less 0.037 million tonnes of exports cannot fully supply domestic consumption, which has stayed in the 0.510 million to 0.515 million tonne range in the three years since 2011.
This wide gap between domestic production and consumption is bridged by imports, which are expected to total 190,000 tonnes this year. In fact, 65% to 70% of processed meat products such as ham and bacon are imported from frozen boneless pork imported from Denmark, Canada and the United States, among others. Australian producers' share of its domestic ham and bacon market is only 30%.
Statistically speaking, that means that 8.2kg of Australia's roughly 22kg of per capita pork consumption is imported.
Lagging but determined to up its game
Unbalanced terms of trade are symptomatic of deeper structural issues that have led to stagnation. According to Spencer, "A cursory look at the figures shows an industry with roughly constant production numbers of around 4.75 million pigs during 2013-14, but behind that figure our industry intelligence tells us that there continues to be rationalisation of pig farmer numbers. The exiting pig farmers from our domestic industry are having their pig production volumes replaced by expansion in some of our larger production units, leading to a relatively flat overall outcome in production volumes."
Such consolidation commonly occurs when livestock sectors are catching up to more efficient world market rivals; and this appears to be the case with Australia: Despite having a reputation for high quality and safety, APL admits that Australian pork lags large exporting countries such as the United States, Canada and Denmark in productivity metrics such as unit production costs and carcass weight.
Under the Strategic Plan 2015-2020 it has drawn up, the APL will focus on three key drivers to enhance Australia's global competitiveness: minimising feed costs; increasing total net revenue; and reducing reproductive waste by improving mated gilt retention.
With domestic pork emphasizing quality rather than cost, low-end, less taste differentiated cuts and processed products suffer the greatest import penetration. Domestically produced processed items like bacon are 30% more expensive than imports from countries like Denmark.
That is why APL states that the Australian swine sector's key challenge is to somehow maintain the high quality standard of domestic production while taming costs and ensuring a reasonable return on capital invested -all without negatively impacting pig welfare, the environment or consumers' health. These latter issues are vital to Australian pork's upmarket reputation and must, in the face of cutting costs, be maintained.
With China, Vietnam and other pork hungry Asian markets facing serious food safety issues, Australian pork has a unique opportunity to differentiate itself. According to APL's most recent five year plan, "To our north are international markets which consume enormous amounts of pork but sometimes have issues with the integrity of their own food production systems. Australia meanwhile is seen as a producer of safe, natural and healthy food."
To Australia's credit, even before the five year plan takes hold, thanks to America's PEDv epidemic, some progress in exporting pork to Asia has already been made: APL CEO Andrew Spencer noted that from January to August, export volumes were up around 11% compared to a year earlier. The exports, he added, were "not coming from traditional markets such as Singapore but from growth in the second tier destinations like Hong Kong, the Philippines and Papua New Guinea."
In all, APL's five year plan has a goal whereby from 2015 to 2020, imports rise 7.4% while exports increase by nearly 50%. While this is feasible, even its success must be put into perspective. At 50,000 tonnes, Australian exports would be a drop in the bucket relative to the 700,000 1 million to 2.5 million tonnes of pork that will be exported by America, Canada and Brazil respectively this year. It also means that imports will rise from the current 190,000 tonnes to around 275,000, leaving it a net importer -but at least its exports will have greater value-added than that of larger rivals.
The best strategy: Country labelling and import substitution
However, even before export momentum can be built up, the APL is pressing to one legal change to win back its domestic market: In a July 26 2014 Australian Broadcasting Corporation (ABC) report, Spencer states, ""Under the [current] laws bacon made from pork imported from Denmark can be labelled as made in Australia, and that's because there's a lot of value-add [that] happens here through the curing, the cooking, the slicing and the packaging."
Because Australian bacon is of higher quality, Spencer and other industry stakeholders believe that with proper labelling of its national origin, up to 30% of consumers currently buying imported bacon would switch to made in Australia brands. If that were to happen, it would represent a vast improvement: Australia's share of the processed pork market would rise from the current 30% to 40%. -And the additional 50,000 tonnes of output this entails (from 2015's APL estimated 106,000 tonnes to 156,000 by 2020) would dwarf any export gains. -Even if exports were to double rather than rise an APL estimated 45%, that would only amount to a gain of less than 40,000 tonnes by comparison.
In fact, the need to bring quality even higher and position Australian pork more upmarket, both at home and abroad is being recognized as an important long-term strategy. But while consolidation continues to boost efficiency and free trade negotiations with various Asian countries lays down a foundation for future overseas market gains, at this time, reconquering the domestic market for processed pork products like bacon is a sufficiently large and profitable frontier.
Hence, while East Asia represents a lucrative export frontier, merely substituting local processed pork products in place of imports offers far greater market gains over the next five years.
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