August 12, 2003
Taiwan's Pork Production Stable But Swine Industry Will Continue To Decline
Imports of pork by Taiwan depend mostly on the prices of pigs. High 2003 prices have been stimulating pork meat imports. The local hog industry is not likely to contract significantly in the immediate post-accession environment because of continuing import controls on variety meats and a relatively cost-competitive domestic industry.
While the Council of Agriculture (COA) has predicted a medium-term, one million head decline in Taiwan's seven million head pig population as a result of WTO-related trade concessions, Post and most industry analysts believe the actual decline will be only half that. Contraction in domestic production and an anticipated increase in consumption may result in increased import demand for pork meat and offal in the medium-term. In the long term, the efficient pig industry will continue to produce pork for the local market, while imports will enter for processing or to supplement occasional shortfalls.
The demand for imported pork variety meats, which adds to the reduced local supply since the 1997 foot-and-mouth disease outbreak, is expected to remain strong for the foreseeable future. As Taiwan's current leading supplier of pork and pork offal, U.S. suppliers should benefit most from WTO market opening measures. Sanitary concerns are likely to keep key competitors, such as South Korea and Mainland China, off the market for several years.
In 2003, swine production (fat pigs slaughtered) is estimated at 9.7 million head, down 2 percent from the 2002 total of 9.9 million and 4 percent from the post-FMD outbreak peak of 10.1 million head in 2001. Post forecasts that total 2004 slaughter will increase by 2 percent to 9.9 million. These totals exceed COA's "target" production of 9.3 million.
The most recent pig inventory survey conducted in May 2003 pointed to shrinking herds compared to 2002 -- despite high 2003 pork prices. Despite attempts to increase herd size, production has been undermined by an outbreak of Porcine Circovirus Infection (PCV), which has a high mortality in pigs weighing between 15 to 30 kg. Despite this, high prices and an eventual decline in PCV will likely result in a larger number of breeding and standing pigs in late 2003 and through 2004.
In the long term, the largely efficient Taiwan swine industry will continue to produce pork for the local market, with imports mainly for processing or to supplement occasional shortfalls.
Pork production will likely stabilize because of Taiwan's relatively cost-competitive structure, with current production costs estimated at 1.2 to 1.7 times North American and European levels. Although pessimists feared that total herd size would fall to 6.0 million, it seems more likely to stabilize at 6.5 million in the next 3-4 years.
The decline of Taiwan's swine sector is expected to continue because several factors:
1. Realization that export markets lost because of Taiwan's 1997 Foot and Mouth Disease (FMD) outbreak will not recover fully in the near term;
2. High feed prices;
3. Increasing post-WTO accession import competition, especially from imported offals;
4. Rising environmental pressures (especially waste disposal) that will increase costs of production;
5. Retirements of elderly farmers;
6. Increasing pressure to divert land to more valuable uses.
The most serious problem facing Taiwan's swine industry is the loss of export channels resulting from the 1997 FMD outbreak. Before 1997, Taiwan was a net exporter of prime pork meat to Japan with the offal left for domestic consumption.
The FMD outbreak caused massive losses from suddenly closed export markets and the costs of depopulating 30 percent of the swine population (3.8 million head). The number of swine farms fell by almost half from 25,300 in 1997 to 13,000 in 2002, with smaller farms failing the most often.
Despite this contraction, 43 percent of total farms still have less than 100 head while 25 percent have less than 20. Most swine production is concentrated in the southwest part of Taiwan in Pingtung, Yunlin, Changhua and Tainan Counties.
Although Taiwan has been FMD-free since 2001 and was officially declared FMD-free in 2003 with vaccination by the Office International des Epizooties (OIE), exports are not likely to recover to pre-1997 levels. COA hopes to restart exports to Japan in 2005 although they admit this estimate is quite optimistic and dependent on Taiwan avoiding another FMD outbreak.
In addition, Japan will only accept imports from countries that have been declared free from FMD without vaccination. Such a status can only come after a region has been FMD free for a year without vaccination.
Even if Taiwan does resume exports, it is very unlikely that trade will return to pre-1997 levels because of a loss in marketing channels and positive consumer awareness in Japan.
The most optimistic estimate is that Taiwan will export from 80-100,000 mt by 2005 -- which is down sharply from 270,000 mt in 1996. In addition, hard-won access to foreign markets will remain tenuous because of possible FMD or other disease introductions caused by contraband imports of Chinese swine.
Pig farms have also suffered because of price competition. Post-WTO offal imports have lowered revenue from offal sales by as much as half, from NT$400 versus NT$800 per head.
This will force pork meat exporters to raise their prices, further reducing their competitiveness. This has created a growing realization that exports will not return to pre-FMD levels, which is causing farmers to stop swine production. Farmers are also aging rapidly, which will also likely reduce the number of farms, especially smaller facilities.
After consolidation, production costs should be even lower than at present, leaving the remaining farms more competitive. This contraction in domestic production and the ongoing consolidation of small farms will likely result in increased import demand for pork meat and offal.
Pig prices, which rose to over NT$6,000/100 kg (US$174) in July, are expected to remain high for the next several months. High prices in 2003 will likely spur farmers to expand herd size in 2004 in spite of increasing import competition caused by increasing TRQ sizes for pork belly and offal.
The potential for increasing supplies has caused concern in COA that late 2004 or 2005 may being a collapse in pig prices. This threat of overproduction has also been magnified by a short-term migration of the unemployed into farming.
In 2002, the break-even point for hog production was slightly more than NT$4,000/100 kg live weight. Taiwan farmers tend to keep the pigs longer (about 6.5 months) on farm than their U.S. counterparts. The average weight for slaughter pigs has remained at 110 kg/head for years.
The direct cost of hog production was NT$3,898/100 kg in 1999 and NT$3,676/100 kg in 2000. (source: Animal Technology Institute, Taiwan) In 2001, production costs were estimated at around NT$3,800/100 kg and auction prices averaged NT$3,997/100 kg.
Taiwan's pork consumption tends to be very stable from year to year, moving in a box around 940,000 to 970,000 tons. Estimated consumption is 947,000 mt in 2003 and forecast consumption is 960,000 mt in 2004. Pork and beef are not close substitutes in the Taiwan market: Changes in pork prices do not affect beef demand significantly or vice versa.
Taiwan's pork consumption is around ten times as large as its beef consumption. The latter also tends to be more specialized in the HRI sector.
Spurred by high Taiwan prices, pork meat imports are expected to total 45,000 mt (CWE) in 2003. Lower prices in 2004 will likely cut imports to 40,000 mt (CWE) despite falling import tariffs. Unlike beef, the vast majority (96 percent from 2002-3) of pork meat consumed in Taiwan is produced domestically.
Although post-WTO liberalization and high Taiwan pork prices have resulted in sharply increased pork meat imports in 2002 and 2003, total volumes remain low. Given the competitiveness of Taiwan pork production, trading volumes and market shares are very sensitive to price and imports mostly exist on the margin.
According to industry sources, imports can rise above 3,000 tons per month if Taiwan pig auction prices rise above NT$5000/100 kg. However, high supplier prices can sharply cut trade - even when Taiwan has high prices. For example, if prices of imported products exceed 38 cents/pound, imports will fall by more than half, to around 1,400 tons per month. Trade sources believe that the market for imported pork meat opens when local auction prices rise above NT$5,500/100 kg.
As another indicator of this market's extreme price sensitivity, U.S. market share has
suffered major losses so far in 2003 because of high U.S. prices and lower prices in Canada.
Canada has doubled its market share in the last two years at the expense of the U.S. In contrast, pork offal demand remains strong in 2003 as processors find new ways to utilize variety meats. It seems likely that the offals TRQ will be fully utilized in 2003 but 2004 remains uncertain. As a result of high prices, the U.S. lost market share, but in the next half-year share should recover, as imports of pork offal will continue to supplement the depressed supply in the Taiwan market. U.S. packers have been modifying their production specifications in order to remain the dominant overseas suppliers to the Taiwan market.
Products Entering Under TRQs
Total 2002 TRQ imports were 4,382 mt for pork belly and 9,614 mt for pork offal. (Source: Central Trust of China) According to CTC, the 10,000 mt pork offal TRQ was nearly all filled while the 6,160 mt pork belly TRQ had 1,778 mt unfilled. Belly spare ribs (soft ribs) have been the most popular items in the belly quota. Country breakdown for TRQ imports are given below. Given these trends, it is likely that the 2003 pork offal TRQ will be fully utilized but that pork belly may not. With demand for imported bellies estimated by COA at 10,000 mt and offals at 20,000 mt, the 2004 TRQs may not fill.
In 2003, the demand for pork offal has been very strong and the TRQ will be fully utilized. The demand for pork belly is less strong but in 2003, encouraged by high domestic pig prices, TRQ may be almost filled. Outside the TRQ, both pork bellies and pork offal are subject to special safeguards (SSG), which allow higher (up to 33 percent) duties under the WTO Agreement on Agriculture.
According to the calculation of the Council of Agriculture (COA), the trigger level for pork belly imports for 2003 is 13,475 mt and that for pork offal is 23,437 mt. The 2003 high out-of-quota duty (55% for pork offal and 287.5% for pork offal) will definitely discourage any imports after quota is filled, let alone the duty surcharge under the SSG.
Trade in pork bones from January to April 2003 was up sharply from 2002 levels, which totaled only 943 mt. From January to April 2003, trade totaled 1,809 mt, including 1,110 mt from Canada, 146 mt from Denmark, 63 mt from Australia, 78 Sweden; 63 Australia, 4 mt from Hungary -- and 417 mt from the U.S.
Upon Taiwan's WTO accession, the former global quotas for pork bellies and pork offal were transformed into Tariff Rate Quota (TRQ). In 2003, the quotas sizes are 10,780 mt for bellies and 18,750 mt for offal. Tariff rates were also lowered with WTO entry. In 2003, quotas for pork bellies and pork offal increased and tariff rates declined as detailed in Table 10. In 2005, the TRQs will be phased out and duties bound at 12.5% for pork meat and 15% for pork offal. However, SSG duties will come into effect when trigger levels are reached.
All TRQ items have been moved to a new Chapter 98 of Taiwan's Tariff Schedule. Pork products that are not subject to TRQ or enter outside of the TRQ (and are subject to out-of-quota rates) are classified under the original tariff classifications in Chapter 2 (for uncooked meat), Chapter 5 (for animal offal) and Chapter 16 (for processed meat). TRQs are open to all WTO members meeting Taiwan's quarantine requirements, except products from the People's Republic of China, which are banned.
On August 8, 2002, Taiwan announced its 2003 TRQs, which total 10,780 mt for pork bellies and 18,780 mt for offals. The application period ran from October 7-9, 2002. On October 23, 2002, the 2003 TRQ for pork belly was allocated through a lottery. Importers or exporters registered with Taiwan's Board of Foreign Trade are eligible to apply. The 2003 TRQ performance bond (NT$2,150/mt for pork belly and NT$2,200/mt for pork offal) must be paid by June 1, 2003, which is two months earlier than under the 2002 TRQ mechanism.
Quotas are tradable. Under the terms of Taiwan's WTO accession agreement, TRQ certificates are valid from January 1 to September 1 and can be extended to December 31 upon presentation of a signed contract. Arrival dates can be postponed to December 31, 2003 if a signed contract is presented to the Central Trust of China (CTC) before the deadline (application made to CTC from August 1 to 25, 2003). Unused TRQs will be reallocated in September.
Effective January 1, 2002, Taiwan redefined "pork offal" to include only hocks, feet, skirt, guts (including intestines and rectum) and stomachs. Remaining pork variety meats were liberalized with WTO entry. Items such as kidneys, tails and hearts no longer require a quota and are effectively liberalized.
The out-of-quota rates for pork bellies fell to 55 percent in 2003 and will decline to 50 percent in 2004. Out-of-quota rates for pork offal are 287.5 percent in 2003 and will be 265 percent in 2004. Imports will be liberalized in 2005 and tariffs for all pork offal will go down to 15 percent. A tariff comparison for other pork products not subject to TRQ is listed below:
Imports of pork tendon were liberalized in 2002 upon WTO entry, meaning that quota certificates are no longer required. However, the import duty for this item was raised from 15% to 25% in 2002. To Post's knowledge, this is the only agricultural item subject to a higher tariff after Taiwan's WTO accession.
Both pork bellies and pork offal are subject to a Special Safeguards (SSG) regime, based on Article 5 of the WTO Agreement on Agriculture. According to the calculations of the Council of Agriculture (COA), the trigger level for pork belly imports is 12,886 mt and for pork offal it is 21,376 mt.
Although demand for pork offal is strong, the high out-of-quota duty will strongly discourage imports above the TRQ level. Lower out-of-TRQ duties make it possible but still unlikely that pork bellies will exceed SSG trigger levels in 2003. Given the low 2002 TRQ and high out of quota rates, it is unlikely that imports will rise above SSG trigger levels until 2004 when the TRQs rise above them. Although liberalization in 2005 could likely trigger SSG duties, some industry sources do not believe import demand will be strong enough to trigger a SSG response.
In order to export meat to Taiwan, a country's meat quarantine inspection and health certification system must be reviewed and found acceptable by the Taiwan authorities.
Taiwan currently allows imports of pork/pork offal from the U.S., Australia, New Zealand, Canada, Denmark, Japan and Hungary. A Dutch request to export pork to Taiwan in 2001 was rejected after a European Foot-and-mouth disease (FMD) outbreak although other EU countries have applied for import permission.
Korea's application for FMD-free recognition was also denied in December 2001. South Korean pork offal is regarded by Taiwan importers as potentially very competitive if allowed entry. Paraguay was also disqualified in 2002 because of FMD.
Countries not currently approved to export meat products to Taiwan must formally apply for approval. The approval process requires bilateral negotiations and on-site inspections of production and processing facilities, which can take several years to complete. FMD concerns are likely to keep competitive South Korean pork products off the Taiwan market for at least two-to-three years. Disease problems complicated by cross-strait political issues will likely keep PRC pork off the Taiwan market for an extended period (see below).
Starting January 1, 2003, Taiwan collected a NT$10/head fee to fund a checkoff program for price stabilization, research and marketing. COA plans to expand this to other livestock and poultry sectors. There were no further details available on how the money will be spent.
The program ran into difficulties as some farmers and legislators objected to the checkoff, despite participation by the vast majority of farmers.
Cross-Straits Trade and Investment
Currently Mainland Chinese pork, pork offals, and pork products are banned entry into Taiwan. Taiwan is expected to gradually relax these administrative controls, but the Mainland will still face SPS hurdles in exporting to Taiwan. Even if permitted, imports from the Mainland would face other barriers such as the lack of a working relationship between China and Taiwan's quarantine services and the lack of direct shipping routes. Taiwan authorities have also banned investment by Taiwan companies in Mainland livestock and meat packing operations although there may well be covert investment in these sectors.
Taiwan Swine Sector Investment
In recent years, uncertainties over the effects of post-WTO trade liberalization have kept Taiwan's swine industry from investing in imported breeding stock. Now that Taiwan is a WTO member and swine farming has remained profitable, the industry will begin to buy seedstock overseas to improve Taiwan's swine genetics. In the first half of 2002, Taiwan imported breeding stock from Canada. Taiwan previously allowed only 4 lines of purebred pigs, Hampshire, Yorkshire, Duroc and Landrace, to be imported for breeding purposes. This limit has reportedly been lifted in line with WTO accession. However, imports of breeding pigs still require a Council of Agriculture approval, reportedly for management purposes only.
CY2002 live pig imports only totaled only 25 head but between 300 and 500 head are expected in 2003 with even higher numbers expected in 2004.
Since pork meat demand in Taiwan depends so strongly on the prices of locally produced pork, export prospects for pork meat can vary greatly from year to year. When Taiwan does import, buyers prefer carcasses because U.S. cuts are different from what is used in Taiwan.
In addition, competitors sometimes give money to importers for "promotion", which can undermine U.S. competitiveness. As for offal, U.S. pork ears are popular this year and U.S. bone products doing well in the market. Note: Offal for retail sale mostly go through wet markets rather than supermarkets.