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Republic of Korea - Livestock and Products Annual 2009

10 December 2009

Higher live cattle prices will encourage increased beef production in 2010. Beef imports are forecast to increase as the local economy and the Korean currency continue to strengthen, according to the latest GAIN report from the USDA's Foreign Agricultural Service (FAS).

Production

Korean cattle farmers were concerned last year that the return of US beef would cut into their profits as live cattle prices weakened. However, farmers’ initial anxiety has waned somewhat as live cattle prices have strengthened in recent months. In fact, the price of Hanwoo calves this past July has climbed back to the same levels not seen since early 2008, which was several months before the resumption of US beef was announced. The strong calve prices are forecast to push Hanwoo cow and steer prices higher in the coming months, which will encourage increased production in 2010. The 2010 calf crop is forecast at 1.1 million head, which will raise ending cattle inventories to a record 3.2 million.

There are a several early indicators confirming this rising trend in production. The first indicator is the rate of artificial insemination. Farmers’ rising confidence in the Hanwoo market is reflected in the higher rate of artificial insemination, which has increased four per cent in the first seven months of this year (Jan-Jul) compared to the same period last year. The insemination rate has really picked up since March. The rate of insemination from March– July has climbed by more than six per cent over the same period in 2008.

A second indicator of higher production in 2010 is a recent survey conducted by the Korea Rural Economic Institute (KREI). According to the survey results, there are more farmers that plan to increase their herd size this September compared to June of this year. In addition, KREI has publicly warned farmers against increasing their herd size since rising cattle prices are unsustainable. In particular, KREI stressed that rising domestic production coupled with higher imports could lead to a future oversupply of beef, which would depress live cattle prices.

The third indicator signaling higher production next year is the stabilisation and perhaps a temporary softening of the local compound feed prices. Domestic prices are reportedly just now being adjusted downward from last year’s record highs resulting from the spike in international grain prices. Although compound feed prices are beginning to move downward, prices are expected to stabilise fairly quickly, according to local industry sources.

As a result of the strong feed prices over the past several years, cattle producers are increasingly mixing their own feed on the farm to minimise costs. The government has also stepped-in to provide support as will be explained under the domestic support section. Some producers are even experimenting with fermented feed, which supposedly improves digestibility and reduces the smell of the manure. Through such practice, these farmers are able to cut down on feed prices and also produce high quality beef, which means higher profits.

As an aside, the use of antibiotics in compound feed is gradually being reduced because of fear over antibiotic resistance in human. The use of seven different compounds was discontinued this year, bringing the total number of approved antibiotics to just eighteen. The number of approved antibiotics will be reduced to nine by 2011. Of note, Korea will continue to allow antibiotics to be used through other methods, such as injection.

The National Statistics Administration recently conducted a price survey to gauge the relationship between live animal and beef prices in 2008. The survey revealed that beef cattle farmers earned 645,000 won per head in 2008, compared to nearly 1,500,000 won per head in 2007. The reason behind this decline in earnings was depressed live steer prices, which had plummeted nearly 25 per cent from the previous year combined with record high feed prices.

Nevertheless, the average retail price of top grade Hanwoo beef loin dropped less than two per cent to 31,871 won per 500 grams. (Please refer to the retail price table in the pork section of this report for the relevant price series.) The larger drop in live cattle prices compared to retail beef prices is mainly due to the farmer's lack of bargaining power. Middlemen use this as a negotiating tool to keep prices down.

Domestic Support

In December 2008, the Ministry of Food, Agriculture, Forestry & Fisheries (MIFAFF) introduced a support program to improve the quality of local beef to enhance its future competitiveness against imported beef. The 2009 plan is to use incentive payments to increase production of Grade 1 or higher beef to at least 60 per cent by 2012, up from 54 per cent in 2008.

The government will provide an incentive payment of 200,000 won (about $173) per head of Hanwoo steers that are 1++ grade or Dairy steers that are 1+ grade or higher. Farmers that produce Hanwoo steers that are 1+ grade or dairy steers that are 1 grade will receive an incentive payment of 100,000 won (about $87) per head. The government’s target for this program is 20,000 head for 1++ grade and 50,000 head for 1+ grade. The total amount budgeted for this program in 2009 is 9,835 million won (about $7.9 million). This program is a temporary program that will only be implemented for 2009 as it was intended to calm down the anxiety of livestock farmers over KORUS FTA. However, MIFAFF is expected to abolish this program at the end of 2009.

As part of this quality improvement program, the government will also spend an estimated $5.36 million dollars in 2009 to support programs intended for improving domestic cattle genetics. The table below shows the trend towards higher graded cattle production.

Quality Grade Trends
Quality Grade
2007 Average
2008 Average
Jan–Jul 2009 Average
1++ 7.5 7.5 7.0
1+ 18.4 19.5 19.1
1+ 18.4 19.5 19.1
1 25.0 27.0 27.2
2 24.5 25.2 26.0
3 23.5 19.9 19.8

Lastly, the government plans to spend $113 million in 2009 to expand domestic roughage production in order to help farmers cope with the relatively high compound feed prices. This program will provide support for silage production and transportation. This program will also provide support for securing farmland to produce roughage as well as the purchase of seeds.

Consumption

In 2010, consumption is projected to increase 7 per cent to 563,000 tons as the economy gradually strengthens and local beef production increases. The rising consumption of domestic beef will put downward pressure on imports. The consumption of beef, both domestic and imported, is largely divided into three segments: retail (25 per cent), restaurant (65 per cent), and food processing (10 per cent).

Consumers have cut back on eating out because of the economic situation. Given that the bulk of beef consumption takes place in restaurants, this has led to reduced beef consumption this year. According to a report put out by one local department store, its restaurant sales had dropped 5 per cent from November 2008 to February 2009. Sales volumes in food courts, which provide cheaper menus, dropped even further, down 6 per cent during this period.

Despite high prices, Hanwoo consumption continues to rise as the butcher-shop style restaurants are offering low priced Hanwoo dishes. These types of restaurants have been very successful in attracting consumers since they can provide Hanwoo beef at a lower cost because of a tax exemption. Under the Korean tax code, beef sold at butcher shops is exempt from a 10 per cent value added tax. Patrons pay a minimal entrance fee (about $3 per person) to enter the butcher-shop restaurant. After purchasing the beef, the customer takes it to the co-located restaurant to cook.

Although the retail market does not account for the major share of both domestic and imported beef consumption, it does reflect consumers' preferences. In general, Korean consumers prefer grain feed beef because of its high amount of marbling.

Historically, the HRI sector accounted for 75-80 per cent of beef sales prior to 2003. However, since the market re-opened last year, some establishments have remained reluctant to serve US beef and currently only account for about 65 per cent of US beef sales in Korea. The restaurant country-of-origin labeling regulation is reportedly constraining sales since some owners’ fear that they might lose customers if they serve US beef.

Retail sales now account for 25 per cent of US beef sales in Korea. Although US beef has been selling in major retail outlets, sales have been slow because of the availability of cheaper Aussie beef combined with some consumers’ lingering negative image of US beef. According to a recent survey, one third of the consumers replied that they would purchase US beef, whereas one third replied that they would never purchase US beef. The remaining one third replied that they would wait and see, or what is referred to as the ‘grey area’. Tapping this grey area will be an important market segment for the future sales of US beef.

Trade

The recent strengthening of the Korean won and the gradual economic recovery is expected to mitigate the downward trend in beef imports in 2010. The Korean won has appreciated against the US dollar 16 per cent since March 2009, and seems to have settled around 1,200 won = $USD. This is a significant turnaround from the previous year when the won lost more than 55 per cent against the dollar during the period January, 2008 to March 2009, as the local currency slipped to 1,462 won = $1USD.

In 2010, beef imports are forecast to remain relatively steady at 260,000 tons. While the size of the pie remains largely unchanged, the share of US beef is expected to grow to almost 40 per cent, up from 25 per cent the previous year. Imports of US beef are forecast at 100,000 tons in 2010.

US beef imports during 2009 are not expected to expand as quickly as was originally projected, but are still on target to grow 55 per cent over the previous year. The lower than expected sales are attributed to several factors. First, Australian beef is cheaper because of a more favorable exchange rate. Second, the prolonged economic recovery and weakened won earlier in the year have made credit harder to obtain thereby slowing imports. Third, ample inventories of US beef remaining in cold storage will limit imports of US beef.

The US beef industry is working tirelessly to win back younger consumers as well as those ‘gray area’ consumers that are still reluctant to purchase US beef. The US Meat Export Federation’s (USMEF) local office is conducting various marketing events and activities highlighting the quality and safety of US beef. More time, money and effort will be required in the coming years build confidence in this particular market segment.

Korea: Beef Imports ($000 and Metric Tons)
Country Annual 2008 Jan-Jul 2008 Jan-Jul 2009
Value Volume Value Volume Value Volume
Australia 611,381 136,265 386,080 119,603 224,418 70,502
New Zealand 140,978 38,099 107,071 40,120 48,917 20,423
United States 193,615 31,989 24,052 4,920 138,328 28,543
United States 193,615 31,989 24,052 4,920 138,328 28,543
Mexico 14,467 4,320 10,093 3,987 2,680 1,265
Others 258 103 213 108 35 17
Total 960,699 210,776 527,508 168,738 414,378 120,750

Further Reading

- You can view the full report by clicking here.

December 2009

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