April 22, 2011
Can Vietnam's swine sector keep up with pork demand?
In Asia's fastest growing feed and livestock market, the swine sector's inability to keep pace with demand could open the door to imports.
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by Eric J. BROOKS
Vietnam is one of the fastest growing markets for feed, livestock and meat consumption not just in Asia but in the whole world. It's proclivity for rapid growth in pork consumption reminds many of China's agribusiness sector in the 1980s and 1990s. However, it remains doubtful as to whether Vietnam can achieve the kind of self-sufficiency in pork which China enjoys to this day. The problem is one of high demand that is growing faster than technology or capital can raise productivity. As we shall see, this puts Vietnam's pork sector at risk of becoming import dependent at a relatively early stage of this country's development.
Demand-pull inflation amid ominous supply side problems
With per capita pork consumption at 23.7kg per year, Vietnam's rapidly growing pork output should approach 30kg within ten years, comparable to that of the United States or Canada. At 75% of meat consumption, pork accounts for a much larger share of Vietnam's meat consumption than is the case in either China or the United States. From 2010 to 2015, the USDA expects the country's swine inventories to increase from 27.3 million to 33.2 million, making for a compounded annual 5% increase in numbers.
As impressive as all that sounds, Vietnam's swine sector is in trouble. At this time, most of Vietnam's pork consumption is accounted for from domestic production but if supply is not managed in tandem with demand growth, this could quickly change. Over the past ten years, pork sales have risen more than twice as fast as swine production. In theory, this creates demand-pull swine price inflation and a healthy return for farmers.
In practice, the inflation in Vietnam's swine prices, while it has a demand-pull angle, is also based on cost-push inflation, which in this case arises from deeply rooted supply-side problems. Inefficiencies inherent in Vietnamese swine production have bloated the country's pork production costs at a surprisingly early stage of its development.
In China by comparison, hog prices only rose above international levels after corn shortages inflated production costs. In the case of Vietnam however, hog rearing techniques are destroying a developing country's assumed cost advantage at a very early stage of its agribusiness development.
This can be seen in Vietnam's pork trade balance. Nominally, it exports a trivial 5,000 to 6,000 thousand tonnes of piglet meat a year, most of it to Hong Kong. While food safety import restrictions block some Vietnamese pork exports, cannot be blamed for the fact it is in danger of giving away it own domestic pork market to imports.
Imports 50% cheaper than domestic pork
At 10,000 tonnes, Vietnam's pork imports already outweigh exports. More to the point, pork import growth is being driven by meat processors. Since Vietnamese will consume more processed meats as its economy grows, this fact has sweeping implications for the country's swine sector development.
The reason is very simple: Despite the fact Vietnam has even lower wages than China, without trade restrictions, the USDA reports that imports undercut the price of domestic pork by up to 50%.
Some of this price differential is due to factors not entirely in Vietnam's control. With a population of 90 million, it has only a fraction of China's land for growing feed or raising livestock. Its growing dependence on feed imports, especially that of corn, inflates its production costs relative to that of domestic corn, which is less expensive.
The main reason for Vietnamese pork's lack of cost competitiveness however, is the unconsolidated, capital-poor, small-scale nature of its swine sector. Populist restrictions on land consolidation keep plots small, so much so that in Vietnam, a farm with at least 20 swine is considered commercial scale and not backyard. According to USDA estimates, roughly 85% to 90% of Vietnam's swine are raised in farms with even fewer hogs than this number. Only 5% of Vietnamese hogs come from farms with more than 100 swine.
Unconsolidated, inefficient, underfed
According to a report by the International Livestock Research Institute (ILRI), by 2020, only 7% to 12% of Vietnamese hogs will be raised in farms of over 100 head by 2020. By comparison, commercial and integrated farms went from less than 20% of hog production to 80% in less than 10 years. Clearly, while Vietnam's pork demand is growing as quickly as China's did, its swine sector is refusing to grow up.
According to a recent USDA GAIN report, "Vietnamese pork producers will have a tough time fulfilling this [pork] demand due to a number of factors, including the lack of available land for pork facilities, low productivity caused by poor herd management, and the prevalence of disease in existing facilities." The fact that present swine rearing facilities are small, undercapitalized is at the heart of the problem. It makes it difficult to trace animals, pork quality or disease proclivity.
Of course, Vietnam's government is aware of the need to consolidate. The country's ministry of agriculture and rural development (MARD) has reduced or eliminated certain agricultural land rents, and has granted preferential tax rates for commercial farms and large-scale slaughter and processing facilities.
The problem is that Vietnam's swine sector demonstrates that unless consolidation occurs, mere imports of technology and capital are not enough to raise the quality of its swine and pork. The USDA GAIN report noted that, "Many Vietnamese farms have introduced foreign (United States, Canada, Thailand, Korea, Spain, France, and Belgium) genetics to their herds in order to increase muscling and the overall size of their swine."
Despite introducing superior western hog breeds, they fail to get western swine productivity. No doubt part of the reason is because much like in China, western hog breeds require more pristine growing conditions than native Asian counterparts. However, the USDA reports that its researchers discovered that when foreign breeds were introduced, "They fail to increase the feed rations commensurate with growthier, heavier animals." Needless to say, minimizing the quantity and quality of feed given to hogs is a cost-cutting strategy that backfires in higher veterinary cost and inferior animal performance.
This and many other issues are rooted in the industry's lack of consolidation: We have already seen how in China, demand for quality feed materials such as corn and soy jumped unexpectedly rapidly when hog sector consolidation took hold. The problem is that consolidation is occurring far more slowly in Vietnam than it did in China. By the time it happens, it is possible that a large part of the domestic market will be lost to imported pork.
Perhaps the most important reason consolidation needs to be priority is that it will significantly improve how hogs are grown, managed and housed. Although land restrictions are unlikely to be remedied, many of the issues regarding low productivity and disease could at least be partially addressed by technical training. At this time, very little livestock management education is conducted in Vietnam. According to the USDA, "What is available is very basic and does not reach farmers in smaller, less affluent provinces. "
If backyard farms were only a small portion of output the way they are now in China, this would not matter. In Vietnam however, the small-scale, rurally-dispersed nature of hog farming makes it a major impediment to raising productivity, even in the presence of superior breeds or even quality feed.
No culling system, limited cold chain
According to the USDA, productivity problems start early, with "Low productivity for sows in small and large herds, alike. The main reoccurring problems are malnutrition of sows during gestation and lactation, as well as ineffective, or non-existent, culling practices." The latter part especially undermines Vietnam's swine sector.
At this time, Vietnam does not have an expected progeny difference system to evaluate the genetic potential of swine from birth. Consequently, by allowing non-productive sows to pollute a herd's gene pool when they could be replaced by more efficient ones, they ensure that rearing costs start accumulating from a high fixed level right at the piglets' birth. Ironically, when a country is underdeveloped country, increasing sow efficiency is the one of the fastest ways of increasing swine productivity and lowering production costs. Unfortunately, this is not happening in Vietnam at this time.
Further up the livestock chain, Vietnam's lack of refrigeration facilities does more than just compromise post-slaughtering meat quality the way it does in Thailand: In Vietnam's case, studies have shown that inconsistent power sources for refrigeration makes it difficult to store and preserve livestock vaccines. This is especially true in Vietnam's rural areas, which are most likely to contain hogs.
Ten easy years gone, ten harder ones coming
In sum, an easy decade has ended for Vietnam's swine producers. For the last four years, feed prices have increased faster than pork prices. With the country growing ever more dependent on corn and soy imports, CBOT price inflation will be imported and this trend can only continue. That makes it more necessary than ever for its hog producers to raise their productivity. The fact that meat processors are already using cheaper imported pork is a warning bell to both hog farmers and policymakers.
Aside from encouraging industry consolidation, professional hog farm management and cold storage infrastructure, Vietnam's government could help in the following way: The country will never be a major pork exporter but it can work to preserve the competitiveness of domestic producers in their domestic market. By allowing Vietnam's currency to rise, it would reduce farmers' feed costs while resulting in little or no loss in exports.
Of course, that would be a short-term panacea and it is imperative to raise the scale and management efficiency of Vietnamese swine rearing as soon as possible.
Fortunately, Vietnam's swine sector has a larger than expected window to organize itself. Surveys by the Inernational Livestock Research Institute (ILRI) show that Vietnamese consumers continue to prefer fresh, unchilled, newly slaughtered pork over frozen meat.
For now, this gives domestic pork, despite its higher cost, an important market advantage. However, as urbanisation takes hold, ready-to-eat meals proliferate and convenience foods take hold, meat processors will not be able to resist the temptation to import less expensive pork. Vietnam is about 10 years behind China in its development and that is how long the country's swine sector has to remedy this situation.
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