November 23, 2016

Vietnam: A pork importer in waiting?

An eFeedLink Hot Topic
  • Once rapid 7% annual growth in demand and consumption has levelled off to around 2%
  • While economic problems held back consumption, low productivity makes for problematic longterm supply fundamentals
  • Unless the industry improves its competitiveness, a coincidence of trade liberalization and recovering demand growth could make it into a major pork importer
While China's vast pork market gets a lion's share of attention, no country's swine sector is expanding anywhere close to the scale and pace seen in Vietnam. Based on USDA consumption figures, from 1996 through 2016 inclusive, China example, saw its per capita pork consumption rise an impressive 49%, from 25.8kg to 39.9kg.
Over this same twenty-year period, Vietnamese per capita pork consumption rose three times faster, by 149%, from 10.9kg twenty years ago, to a 27.1kg today –which is about 5kg more than the amount of pork most Americans eat annually. Moreover, even during a decade when its economic growth slowed down, Vietnamese continue to eat 2% more pork and 1% more per person every year.
The problem is that Vietnam's swine sector has slowed down and so has its economy –but the latter will not do so for too long. A recent World Bank study concluded that once its economy recovers, its pork consumption may grow up to 8% annually. This is comparable to the pace it expanded from the mid-1990s to late 2000s.
The question is whether supply, which has been expanding only 2% annually will be able to keep pace with demand. The signs, frankly, are not good. While the industry has made progress, it is not nearly enough and the country has few years left before imports come knocking on its door.
From 20.5 million head, hog inventories reached an all-time peak of 29 million head in 2007. Thereafter, pork production kept rising but with fewer pigs. The number of hogs fell to approximately 27 million in 2010 and is estimated to be closing 2015 at close to 25 million head –but the country is producing 35.5% more pork than it did in 2007. That implies a respectable 56% improvement in carcass yields in just nine years.
The problem is that despite this great improvement, pigs in China yield 17% more meat per carcass while those in the west produce up to 50% more pork per slaughtered animal. Nor is this productivity shortfall confined to swine performance. At a time when US sow litters average 23, Vietnamese sows produce an average of 12 piglets annually, though this figure hides great disparities: Large, integrated farms have 20 piglets per sow but 60% of hogs come from farms that produce less than 10 piglets per sow.

With 60% of the population still living in rural regions, the situation mirrors that of China two decades ago, with most pigs coming from farms with 20 or fewer finishing hogs and one to five sows. While there are 10,000 medium or large-scale farms, they account for only 15% of output.  A little over a tenth of output is accounted for by state-of-art foreign integrators including Thailand's CP, Indonesian owned Japfa Comfeed or Philippine-based San Miguel.
Moreover, whereas a minority of foreign integrator or larger scale farms rely on more efficient imported breeds, the backyard farming majority lacks the capital to do so. This means that until the politically painful process of driving backyard farms out of business and boosting consolidation makes progress, there is a lid on just how much productivity can be improved.
The resulting lack of competitiveness is made worse by Vietnam's protectionist feed crop policy. It now imports half its corn and since turning net importer in 2007, has become the fifth largest buyer on the world market. Even so, government protection of local corn famers keeps production costs artificially high. Consequently, between low production scale, resulting high unit costs, poor carcass yields and low sow productivity and high feed costs, Vietnamese pork costs anywhere from 60% to 100% more to produce than its western competition –and this threatens to turn into a very large problem.
Going forward, the EU-Vietnam free trade agreement is allowing EU pork to enter Vietnam for the first time. Starting in 2019 and ending in 2022, import tariffs on European pork will gradually be cut to 0%. Moreover, even before tariffs can be cut, producers can already feel the competitive heat.
Even in years when hog diseases caused pork shortages, imports never went above 12,000 tonnes, and that was back in 2008. Since 2012, they have ranged between 2,000 and 6,000 tonnes –but this is already changing: Taking early advantage of its growing trade liberalization with the EU, Rabobank's Q4 Pork Quarterly reports that Spain alone is exporting 9,000 tonnes of pork to Vietnam this year, which is 350% more than the 2,000 tonnes it imported in 2015. Not only will imports from Spain greatly exceed the 2,000 tonnes projected by the USDA for this year, there could be other European producers with export plans which we are not aware of at the time of publication.
Granted, even if 2016 imports exceed expectations, they will still amount to less than 0.5% of consumption. The problem is that this small European export volume is a trial balloon –EU producers are obviously testing Vietnam's market and fine-tuning their strategy for when import tariffs fall steeply at the end of this decade.
In that sense, Vietnam's policymakers have about two years to come up with a painful plan to boost their swine sector's productivity –painful because it will entail the exit of countless backyard farms from hog rearing, possibly before they can find a new occupation. If they fail to do so, they only need look over their shoulder at China or the Philippines.
Due to their government-imposed high feed costs, both of these East Asian countries underwent rapid pork import growth. In Vietnam's case, even if consumption grows at half the 8% overoptimistic World Bank forecast, the imports will flood in far more quickly than they did in China or Philippines.
Hence, given its high feed costs and an inefficient hog farming structure, Vietnam faces two choices: Either make its swine sector efficient and become a top world producer, or let import flood in, and become a leading pork buyer.

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