July 27, 2016
Time to reform Vietnam's swine sector?
By ERIC J. BROOKS
An eFeedLink Hot Topic
- With output growth levelling off amid rising swine productivity, post-2010 output growth has coincided with falling hog inventories
- Despite the large increases in productivity, inefficient practices, decentralization, artificially high feed costs make Vietnamese pork among the world's most expensive
- Rising costs and faltering post-2010 economic growth has slowed the industry to nominal growth rates
- With the TPP set to abolish pork import tariffs of up to 30% over the next ten years, it needs to reduce hog feed costs and keep its pork internationally competitive
Vietnam's world leading agribusiness expansion was once fueled by its booming swine sector, but this unfortunately no longer the case. A half decade when Vietnamese pork's expansion not only slowed down but repeatedly came in below conservative, toned down forecasts implies that something is amiss.Last year, production again fell short of expectations. The 2.45 million tonnes produced in 2015 did more miss the 2.9% growth to 2.52 million tonnes initially forecasted by the USDA. It was only 1% higher than the previous year's pork output and the subpar performance has extended into this year.
Instead of rising 4% to the 2.548 million tonne level initially forecasted, the USDA now expects Vietnam's pork output to total 2.475 million tonnes –this is a mere 1%, 25,000 tonne increase that one expects to find in mature western markets, not in the world's fastest growing agribusiness sector.
Nor is this a short-term slowdown anymore. From a growth rate of 12.9% in the years 2000 through 2005, Vietnamese pork production's CAGR fell to 7.3% from 2005 through 2010. If this year's forecast is correct, then the years 2010 through 2016 will have seen pork output growth of only 2.2% over the last six years, which is barely faster than the growth rate of America's mature swine sector.
On one hand, productivity has risen impressively, and, more importantly, continues to do so: From 2000 through to 2015, based on USDA and Vietnam ministry of agriculture and rural development (MARD) figures, productivity can be estimated to be rising at ranging from 4.3% to 4.6%. While the industry remains mostly small scale and decentralized, a variety of factors including consolidation-driven scale economy increases, better hog genetics and higher quality feed materials has made productivity rise in excess of 4% from the turn of the century through today.
On the other hand, while productivity continues to increase, output's once rapid expansion is tapering off in a surprisingly rapid way. From the near 10% pace of the 2000s, pork production is rising by a mere 2% annually now. As a result, post-2010 productivity improvements have been reflected in gradually falling inventories. From 20 million head in 2000, hog inventories initially expanded rapidly, peaking in the mid-2000s and thereafter fluctuating in the 27.5 to 30 million range from 2005 through 2010.
Since 2010, hog numbers have been slowly declining, to an estimated 26 million head entering this year. Needless to say, despite the impressive productivity growth, output cannot grow at the rapid rates that were once taken for granted if inventories do not increase. Thus, on the basis of the past five years of slowly declining hog numbers, pork production increasingly looks to be levelling off slightly above 2.5 million tonnes.Alongside the flat pig numbers, many other factors offset Vietnamese swine's still good productivity growth. For one thing, Vietnam's government, like that of India or the Philippines, is trying to do the impossible: Maintain both feed crop self-sufficiency and meat production, even though the latter has clearly outgrown its domestic feed crop base. Thanks to high domestic corn prices, poor crop storage techniques and bans strict controls on imports of cheaper feed grain, production costs are much higher than they need be.
The resulting high production costs are then made worse by swine sector productivity which, while rising rapidly, remains dreadfully low. While the ongoing importation of superior breeds continues to improve performance, for now, hogs on average yield significantly more fat and less muscle than their western counterparts. Similarly, the average of 12 finishing pigs per sow is low, yet hides wide performance disparities: Leading integrators get 20 finished pigs per sow annually, but the bottom 60% of producers get fewer than 10.
Nor do these statistics capture the high rate of productivity sapping disease epidemics suffered by its hog herd. These include PRRS, porcine epidemic diarrhea, foot-and-mouth disease. There are also chronic problems with high infertility and miscarriage rates, which are thought to be a by-product of low quality, mycotoxin contaminated feed materials. All this, not surprisingly comes down money, or to put it more eloquently, a lack of farm capital: According to MARD statistics, over 60% of Vietnamese hogs are bred in backyard farms that feature one to five sows and fewer than 20 finishing hogs.
Needless to say, it will take several decades of productivity improvements –some of which require industry consolidation –before Vietnamese hog carcasses yield a volume of pork meat comparable to what is taken for granted in more advanced agribusiness sectors. Germany for example, produces 1.5 times more pork from the same number of hogs as Vietnam.
Combined with low carcass yields, the post-2008 high feed cost base has made Vietnamese pork more than 100% above the cost of other countries. For example, according to information compiled by swine breeding services provider Genesus, in the first quarter of this year, Vietnam's average live hog unit cost was US$2.12/kg, versus US$1.00/kg in Brazil, US$1.03/kg in the United States, US$1.28/kg in Mexico, or US$1.45/kg in Russia. –Only China (which is phasing out artificially high corn prices) has more expensive domestic pork than in Vietnam.
Moreover, Vietnamese pork, though it was always pricier, did not see the cost gap with international swine prices open up until the late 2000s, when global feed cost inflation coincided with it the country's feed corn demand outrunning domestic supplies. Instead of coming in at 2.51 million tonnes, domestic consumption is only totaling 2.43 million tonnes.
Nor is this a short-term slowdown: After rising by more than 7% annually and doubling in the 2000s, the last six years has seen domestic pork consumption only increase at a 1.7% annual rate, which barely keeps pace with population growth. Based on USDA statistics, per capita pork consumption, which jumped from 10kg in 1995 to 13kg in 2000 and 25.3kg by 2010, has barely moved since, rising to only 26.3kg this year.There is more to sputtering demand growth than the swine sector's own troubles: Vietnam's rate of economic growth has fallen sharply since 2010. Unlike the 5% to 10% personal income increases of yesteryear, US$2,036, 2015's per capita income is virtually unchanged from the previous year. –And it is this coincidence of stagnating personal incomes with pork prices rising to world-leading levels that has been underrated by many observers of Vietnam's promising swine sector: For while the World Bank has forecast Vietnamese pork consumption to rise by 8% annually, since the start of this decade, the past five years has seen it increase by only 25% of the projected forecast.
Despite such troubles, Vietnam's pork sector remains promising; its swine sector resembles a scaled down version of China's hog industry in the late 1990s –except that China did not have feed costs so far above international prices at that time. This is problematic for Vietnam over the longrun.
Once the country's rapid income growth resumes, its swine sector could change a vastly changed economic landscape: Under the terms of recently signed Trans Pacific Partnership (TPP), within five to 10 years, Vietnam must gradually eliminate tariffs of up to 30% on imported pork cuts.
If the government does not liberalize its feed crop imports, Vietnam could condemn its pork sector to the same fate as that of the Philippines, where artificially high corn prices have caused imports to rise 4 times faster than consumption over the last fifteen years. With its economic growth projected to rebound to 6.7%, Vietnamese consumers are probably a year away from resuming their growth in personal incomes and pork consumption. Given the impending liberalization of the country's pork trade, the question is, 'how ready will its swine sector be to take advantage of the coming years prosperity?'
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