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November 25, 2016

Japan & South Korea: A tale of two mature pork loving markets

By ERIC J. BROOKS

An eFeedLink Hot Topic
 
  • Japan's swine sector, though large, is flat and levelled out at lower personal consumption levels than that of poorer, neighbouring Asian countries
  • Japan's zero population growth and tiny increases in personal consumption means that imports will not rise too far above their current 1.3 million tonne range
  • South Korea's domestic production continues to expand, though more slowly than imports
  • Despite eating 80% more pork than Japanese per capita, consumption is lower than in China and continues to grow up to 3% annually
  • With South Korean consumption and imports continuing to grow, both countries should be importing 1.3 to 1.5 million tonnes of pork by the late 2020s
While China now imports twice as much pork as anyone else, North Asia's leading two economies remain world leading swine markets. While not growing nowhere nearly as rapidly as China, Japan and South Korea remain important, large stable sources of world pork demand, though with important differences.
 
Japan: Flat production, large import demand but very little growth
 
One important difference is that Japan's swine sector, economy and population have all literally levelled out. Not only is the most developed Asian nation's swine market the flattest, but it levelled out at lower consumption levels than that of poorer neighouring countries such as China or Vietnam.
 
In 1980, Japanese on average ate 14.3kg of pork, which was the highest swine meat consumption level in Asia at that time. By 1990 when Japan's economy made a secular peak, they were eating 16.7kg. this was less than the amount eaten by South Koreans at that time. In fact, despite having a per capita income of only a few thousand dollars, Chinese pork consumption per person also overtook Japan's in the 1990s.
 
Possibly due to the two-decade economic crisis it has endured, in the years from 1990 through 2015, per capita pork consumption only rose to 20kg. By this time South Koreans and Chinese were eating 80% and 98% more pork per capita respectively. –But whereas China remains 95% self-sufficient in pork consumption and South Korean pork imports grow faster than output, Japan's is far more import dependent, with imports accounting for approximately half of consumption.
 
To put it another way, since 1980, Japan's pork consumption has risen 55% but its 2016 pork production is 14% lower than what it was 36 years ago. Having peaked at 1.6 million tonnes in the late 1980s, pork production has fluctuated in the 1.2 to 1.3 million tonne range from the mid-1990s all the way through to today. With its population staying stable or slowly declining and its economy flat, Japan's market may be large but there's not much scope for growth in either domestic output or imports.
 
Having said that, some industry restructuring is underway. It has a dwindling population of medium size and backyard farms which, while given subsidies and protection from imports. With most of these small-scale farmers being above age 55, their numbers decline as they retire and exit the industry.
 
Several PEDv outbreaks between 2014 and 2016 accelerated this process, causing the total number of hog farms to fall 8%, from 5,250 to 4,830 over two years. This was accompanied by a 7% increase in average farm size, to 1,928 head over this same time. Japanese hog farming's relatively small scale reflects the fact that in Japan, domestic pork is a higher end niche product that competes on reputation and marketed for its unique taste tradition, rather than its cost competitiveness. This gives it far less incentive to boost scale than is the case in China, which is feed rich by comparison.
 
Going forward, while the country is fully recovered from PEDv outbreaks, with larger farms increasing output by an amount equal to production lost from smaller farms exiting the industry, Japanese pork production will stay in the same 1.25 to 1.30 million tonne range that it has fluctuated in since 2010. While it will remain the world's second largest pork importer, volume growth will be that of gently rising plateau, with annual import volume increases averaging 1% or less.
 
South Korea: Slow production increases, lots of room for import growth
 
By comparison, whether one speaks of its domestic fundamentals or potential for import growth, Asia's second largest developed country swine market is far more dynamic. Reflecting both South Korea's 'catching up' to Japanese living standards and a more buoyant, resilient economy, South Korean hog herds continue to increase, though at far more incremental pace than before the year 2000.
 
For the past fifteen or so years, South Korean pork production could be best described as a gently rising plateau, with occasional sharp dips and rises. Currently, both hog numbers and domestic pork production are expanding, though 2013's record output will not be exceeded until next year.
 
For 2017's projected record 1.263 million tonne output, while 2.5% higher than this year's 1.232 million tonnes, will be only 0.9% more than 2013's 1.252 million.
 
Having over expanded in their recovery from a serious 2010-11 FMD outbreak, 2013 saw an oversupply of pork and low import prices exert deflationary pressure on Korean hog farmers.
 
The resulting large scale herd culling included a lot of sows. With sow numbers depleted, both inventories and pork output were depressed for several years. The resulting herd reduction was accelerated by a nasty H1 2015 PEDv outbreak. The domestic supply shortage that followed led to two years of high prices and good returns.
 
Consequently, after the PEDv outbreak was brought under control, sow numbers turned sharply upward, reaching their highest level since 2010 by the middle of this year. Most telling was that while overall H1 2016 swine feed demand rose 4.3% from a year earlier, the quantity consumed by (mostly pregnant) sows jumped 27.3%. From a USDA estimated low of 895,000 head in early 2013, sow numbers jumped 7% to open 2016 at 958,000 head. This year, sow inventories are rising a projected 2.3% to open 2017 at an estimated 980,000 head, their highest level since 2008.
 
A rising number of conceiving sows is pushing up herd levels. Even though sow numbers are below their all-time peak of slightly over a million-head established in 2008-09, because they now produce up to a quarter more piglets annually, hog numbers are being boosted to record highs.
 
From a low of 9.91 million head at the start of 2014, hog numbers rose 7% over 3 years to close 2016 at 10.6 million head, with the USDA projecting a 3.8% rise to a record 11 million head by the end of 2017. Over the longer term, since 2000, hog numbers have risen at a 2.3% annual rate. This reflects the fact that unlike Japan, Korea's economy, population and living standards are still expanding.
 
Consumption growth, while tapering off, continues at a slower pace. From 6.2kg in 1980, per capita pork consumption rose to 22.7kg in 2000, 27.3kg in 2005, 31.2kg in 2010 and based on USDA estimates, will amount to 36.3kg in 2017. While per capita consumption no longer grows at the torrid 6% annual rate it did from 1980 to 2000, two factors have enabled it to keep expanding by 2.2% annually rate in the years since 2010.
 
The first is record high beef prices, both in Korea and around the world. These create a red meat price differential in favour of pork consumption. For example, the USDA notes that lower grade.

Korean Hanwoo beef prices jumped from 1.25 times domestic pork's price in 2015 to 1.53 this year. Similarly, Australian beef went from 1.15 times the average cost of Korean pork in 2011 to 1.27 in 2015 and 1.35 times its average cost in by mid-2016.
 
Second, free trade agreements signed between South Korea and Australia, the US and more recently, Canada is enabling imported pork to enter the country more easily and cheaply than before. In recent years, this coincided with a depreciation in the Euro's value and a large quantity of EU pork being exported to East Asia. Thus, from 2006 through 2016, consumption rose by 31.5% or nearly 50% faster than domestic pork output, which increased by 23.2% over the same time. 
 
This is all part of a larger story, for whereas Japan has been importing pork in mass quantities since the 1970s, South Korea only started doing so after 2000. This is partly due to the fact its economy boomed after Japan's and partly because it opened its markets to imports later. From 184,000 tonnes and 17% of consumption in 2000, imports jumped 231% in 15 years and 33% of consumption or 610,000 tonnes in 2015.
 
While this is slightly lower than the 640,000 tonnes of pork imported during 2011's catastrophic FMD epidemic, it still represents a 49% increase over ten years. In fact, even after recovering from the FMD epidemic, South Korean pork imports still grew 56% in three years, from a USDA estimated 388,000 tonnes in 2013 to a projected 610,000 tonnes in 2016.
 
The past year saw a continuation of this trend, with consumption rising 3.0%, production 1.2% --and the difference being made up by rising pork import volumes. –In fact, even with South Korean hog inventories rebounding strong, next year will see a continuation of this trend: For 2017, the USDA expects consumption to rise 1.2% (from 1.68 to 1.90 million tonnes), domestic pork output to rise 2.6% (from 1.232 to 1.630 million tonnes) and imports to jump 3.3% (from 0.61 to 0.63 million tonnes).
 
Over the longterm, high domestic production costs favour imports dominating the lower half of the consumer market and increasingly being used in food processing. Thus, once the current uptrend in sow and inventory numbers peaks in 2017, the years after 2018 should see import growth decelerate slightly from the 10%+ pace seen since 2013 to slightly over 5% through 2030.
 
With South Korean pork imports poised to keep growing and Japan's market staying flat, it means that by the late 2020s, South Korea and Japan will each be importing somewhere between 1.2 and 1.4 tonnes of pork annually, thereby acting as a collective counterweight to neighbouring China's even larger pork import market.
 
We can expect that within a decade, imports will be close to 60% of consumption in both South Korea and Japan –the difference being that South Korean imports will keep growing as will domestic pork output, with the latter expanding at slower rate.
 


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