September 19, 2003



Outlook For China's 2004 Beef Imports

China's beef imports for 2004 are forecast at 30,000 metric ton, according to an article released Thursday on the U.S. Department of Agriculture's (USDA) Foreign Agricultural Service web site.


Executive Summary


China's 2004 beef imports are forecast at 30,000 Tons, exceeding this year's consumption and is likely to remain strong as a result of the above this "SARS rebound." Imports will also benefit from lower tariffs while demand for high-end muscle meat and beef cuts surpass domestic production. Beef consumption in the second quarter was down due to the  SARS outbreak in spring, but has since recovered. Pork and poultry however, were much more affected by SARS than beef, perhaps because cattle are seen to consume more natural feed and thus are less open to contracting the SARS virus. Higher international beef prices may weaken beef imports for 2004.


China's total cattle inventory increased slightly in the first quarter of 2003 over the same period of 2002. However, beef cattle inventories and beef production are both forecast to remain unchanged while dairy cattle production rises because dairy demand is even stronger than beef. Among all foodstuffs, dairy products are considered to improve health, thus the greater government attention to the industry. This trend will continue into 2004 as more investment goes into dairy. Strong beef consumption is driven by demand in the fast food, hot pot, and traditional stir-fry and newly developed Korean food sectors.


During 2003 China's pork imports look set to go down 56,000 tons due to panic on consumption during SARS, but will recover to 70,000 MT during 2004, the attache said. Import demand will remain strong for pork offal and feet, which make up a major component of China's frozen pork imports. Pork production is increasing slowly but steadily as overall pork consumption is still growing. Even as the population grows, pork is facing more competition from the growing popularity of other varieties of meat. China is generally self sufficient in pork production.


China's health officials are strengthening the country's regulatory environment, as consumer concerns about food health and safety rise. This poses challenges for both domestic producers and key supplying countries such as Denmark, the United States and Australia. FAS/Beijing and the U.S. Meat Export Federation are working closely with China's regulators to ensure China's import requirements remain transparent.


Beef And Cattle


Slower growth in China's cattle and beef sector has prompted the government to announce a nationwide "Beef Advantageous Development Area Program".


China's total cattle inventory in the first quarter of 2003 was 124.8 million head, 1.4% up over the same period of 2002. The slight increase is most likely due to growing inventory of dairy cattle rather than decreasing draft animal numbers. Farmers it seems were compensated for lowering draft numbers. Another factor for the increase this year was because the Chinese Government resumed state meat reserves, but the reserve pattern was changed from frozen meat to mainly live animals. Although the reserve target was small (i.e., only about one percent of total beef production), the policy change may have encouraged farmers to increase their cattle inventories. Despite these efforts by the government, growth of the beef cattle industry is forecast to remain slow. Several factors constrain the Chinese cattle and beef industry. First, genetic improvement lags far behind many other countries. Purely bred beef cattle herds are very small.


Crossbred local draft breeds with western genetics only reach 30 percent. Investment in cattle genetic improvement mainly goes to the more profitable dairy sector; therefore breeding dairy cattle imports always dominate live cattle imports. Chinese cattle genetics result in much lower carcass weight than the world level on average after slaughter, thus actually making production costs higher.


Second, limited arable land in China constrains growth of the cattle industry. Due to China's burgeoning population and limited arable land, fertile land is increasingly being converted to cash crop production. This trend makes feed and fodder production more costly. The lack of natural grassland is another related concern, partially stemming from serious over- grazing on natural grassland. The grazing rate on natural grassland is 130%- 140% on average, and some places even as high as 300%. According to a new survey by the Government, overgrazing combined with small investment and natural disasters have led to 90% of China's natural grassland deteriorating. To address the over-grazing problem, the Government recently announced a "Grassland Law" that will reduce the number of grazing animals.


Cattle farms are still predominately small-scale, and family households raise 70% to 80% of China's cattle. As a result, it is still very difficult to control major animal diseases. A comprehensive veterinary system is still inadequate for all cattle. Finally, China's slaughter and processing sector remains under-developed. Most slaughter and processing plants cannot meet sanitary requirements domestically or internationally.


In response to these challenges, China's Ministry of Agriculture (MOA) recently initiated a National strategic "Beef Advantageous Development Area Program" for 2003-2007. The two areas are China's Central Plain and the Northeast, the traditional center of China's livestock industry. These areas will shift their marketing focus to higher quality beef production in order to gradually substitute imported beef and increase exports of high-end muscle beef in the future. However, it remains to be seen how long the program will take and whether Chinese beef can compete, quality and price-wise, with international high-end beef products.


The other issue is the uncertainly of feed and fodder supplies. For the foreseeable future, China's beef industry will not threaten U.S. beef exports to China, but longer-term production improvements may cut into import growth.


Rising Chinese consumer income leads to increase meat consumption per capita and demand for higher quality meat in 2004. This has been met with rising meat safety concerns.


Strong beef demand in the first quarter of 2003 was disrupted in the spring by the sudden outbreak of severe acute respiratory syndrome (SARS) in China. Consumption fell sharply in April and May, due to the panic of contracting the disease, as consumers avoided hotels and restaurants during this period. Fortunately, the SARS crisis was short-lived in China. With SARS under control by July 2003, WHO lifting the China travel ban and the government lifting domestic tourism travel, consumers have resumed dining outside. As a result, demand for beef has rebounded. During the third quarter of 2003 beef demand is forecast to recover to pre-SARS levels and remain stable through the rest of the year.


Overall, the pace of growth in beef consumption during 2003 is forecast below pre-SARS forecast levels, yet the total quantity is still above the previous year.


The outlook for 2004 shows steady increases in per capita and total beef consumption due to rising incomes, particularly in urban centers, and diversification away from traditional meats like pork. As the standard of living improves, consumers are demanding higher quality beef cuts. The constraints on China's domestic production and supply will result in continued increases in imports of higher quality beef during 2004.


Chinese consumers are also becoming more discriminating about food safety and health issues. In turn, China's health authorities have increased meat inspections and standards at stores. The traditional wet markets, where farmers directly sell their products, face increased pressure as they struggle to meet stiffer safety and inspection requirements.


These conditions favour increased sales of frozen beef - including competitively priced imported products.


In response to the changing food safety regulatory environment in China, the U.S. Meat Export Federation, with cooperation from FAS/Beijing, sponsored a series of seminars to strengthen China's understanding of the U.S. meat safety system and how both industry and government can work cooperatively. Participants in China included officials from the Ministry of Health, AQSIQ and the meat trade. USDA's Cochran Program also helps foster technical exchanges between China's quarantine officials and their United States counterparts.


China's growing economy and production constraints keep upward pressure on prices.


With the combined factors of a growing meat consumption outpacing production, beef prices are expected to rise throughout 2003 and 2004. The Ministry of Agriculture reports that although China's beef prices on average in June 2003 rose only slightly against March, prices rose by 8% over the same period in 2002. Strong demand, continued economy growth and production constraints will keep beef prices high for the rest of 2003 and the coming 2004.


The 2003 SARS outbreak and BSE in Canada have shift live cattle and meat trade patterns, but imports are expected to recover in 2004 with U.S. products taking the lead. In recent years, China's beef market is typified by growing levels of imported product filling the shortfall in domestic production as overall meat consumption rises. The 2003 SARS outbreak and resulting decline in restaurant patronage, is forecast to slow this pace of import growth.


According to trade contacts, beef imports were interrupted during the SARS period due to transportation problems and delays in issuing China's Import Quarantine Certificate. Fortunately, the SARS situation was short-lived. As a result, beef imports in 2003 are still forecast above last year's level. Strong demand for the rest of the year and into 2004, coupled with further import tariff reductions, are forecast to sustain beef imports at or above this year's level. Only much higher beef prices and an unpredicted food safety issue could dampen this forecast.


The detection of BSE in Canada has not directly affected U.S. beef exports to China, and China's imports of Canadian beef are insignificant. However, some traders report Canada's BSE situation could become a problem if China's quarantine authorities, AQSIQ, impose additional export certification requirements on how the U.S. has treated cattle imports from Canada and what measures the U.S. has taken to prevent BSE. In particular, according to trade contacts, China may impose additional import measures if other Asian countries take the lead. FAS/Beijing and the U.S. Meat Export Federation continue working with AQSIQ to strengthen their understanding of the science-based risk assessment, monitoring and testing being done on cattle in the United States to ensure the highest quality of exported U.S. meat products.


In part due to the detection of BSE in Canada, this year China and Australia signed a protocol allowing more types of Australian meat to enter China. Canada was China's second largest supplier of live cattle in 2002, and China promptly switched to other suppliers such as the United States and Australia. Trade contacts also report Australia's meat industry may focus trade promotion efforts on high-end chilled beef for supermarkets or restaurants. This business would not directly compete with the segment of the market utilizing U.S. exported frozen beef products. However, if prices of Australian beef products remain competitive and much of the imported beef is used in restaurants, Australia's efforts could hurt exports of U.S. high-end muscle meat to China.


During 2003 China's imports of dairy cattle are increasing sharply due to China's investment in the dairy sector and herd improvements. China's imports of breeding cattle were 11,432 head during 2002, more than quadrupling the previous year. While Australian suppliers dominate China's import picture, U.S. suppliers are slightly gaining due to higher quality, according to traded sources. The BSE problem in Canada also provides an opportunity for the United States to increase exports.


This year China's imports of muscle meat have outpaced growth for offal. According to U.S. trade statistics (e.g., combination of exports to the mainland and Hong Kong with most re-exported to the mainland), muscle beef exports exceeded the volume of offal exports. The gradual transition from higher quality meat reflects China's growing economy, higher incomes and a more discriminating consumer. With domestic supplies unable to meet demand and further tariff reductions in 2004, this trend will further continue this year and the next.


The United States is the largest supplier for both beef meat and offal. However, the Chinese data inflate U.S. offal exports because large volumes of offal enter China represented as U.S. products to avoid quarantine restrictions placed on European and South American countries. Although traders can choose direct shipments or use Hong Kong middlemen (i.e., transportation companies) to import, direct shipments are gaining. Traders explain that middlemen provide a package price for delivery, and a large portion of trader's profit is reduced by the so-called transportation cost. According to traders, it is also easier to obtain Import Quarantine Permits for direct shipments.


Despite China's admission to the WTO and phased-in reductions in import tariffs, the country still maintains 30 to 46% tariff rates (MFN + VAT) on selected meat cuts. These high tariffs increase the cost of imported meat products and raise food costs for consumers in China.


As for the outlook for Chinese beef exports, a decline can be expected because demand in Hong Kong, the main export market, has been shrinking. EU countries appear likely to continue banning most Chinese meat products due to health concerns. Moreover, it is still uncertain how long the "SARS effect" will continue to impact the shaken confidence in Chinese products.



Source: USDA