USDA GAIN: Korea Livestock & Products Semi-annual

USDA GAIN: Livestock and Products

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13 March 2012

USDA GAIN: Korea Livestock & Products Semi-annual

Soft cattle prices resulting from an oversupply of domestic cattle is expected to spur an increase in the animals marketed in 2012. Rising slaughter will push cattle inventories down for the first time in over a decade to 3.25 million head. With beef production projected to climb higher, imports are forecast to come down to 400,000 MT. Imports of U.S. beef are forecast to hold steady at 160,000 MT, accounting for 40 percent of total imports.

Commodities: Animal Numbers, Cattle

Production

After confronting Foot & Mouth Disease (FMD) in late 2010 and early 2011, Korean beef cattle farmers are now facing an even bigger challenge with plummeting cattle prices. Live steer prices have dropped over 35 percent between November 2010 just before the FMD outbreak and January 2012. See price series at end of cattle section for more detail. The main reason for the price drop is a surplus in local cattle inventories, which have increased 70 percent over the past decade and 26 percent over the last five years.

In order to buoy local cattle prices, the Ministry for Food, Agriculture, Forestry & Fisheries (MIFAFF) recently announced a 30 billion won ($26.7 million) incentive program to encourage cattle farmers to send lower-performing cows (e.g. inferior progeny) to market instead of breeding them. MIFAFF is targeting to reduce the number of these substandard cows by 100,000 head in 2012 and another 100,000 head in 2013. Farmers will receive 500,000 won/head ($444) for heifers and 300,000 won/head ($267) for cows.

MIFAFF has also announced plans to purchase 1,000 Holstein steer calves for veal production, which is an underdeveloped segment of the local beef market, in order to reduce inventories and stabilize prices. The government will also continue providing support to agricultural cooperatives under the NACF umbrella to carry discounted price promotion activities and will supply the military with domestic Holstein beef instead of imported Australian beef.

While cattle prices still remain far below pre-FMD levels, these concerted efforts have helped to stabilize the market and have put the brakes on production. In fact, according to a recent think-tank survey, more farmers are looking to reduce herd sizes this year due to the decline in cattle prices. See survey results below. However, based on strong Hanwoo semen sales last year, 2012 production is only forecast to come down 2 percent from the previous year to 990,000 head. Meanwhile, the production estimate for 2011 was raised to 1.0 million because of high insemination rates the previous year.

Slaughter

High inventories, low cattle prices, high feed costs and the government’s plan to market lowerperforming cows will push the 2012 total slaughter estimate upward to nearly 1.1 million head, an increase of about 27 percent over the previous year.

The ratio of cow slaughter as a percentage of total slaughter is expected to increase as live cattle prices remain soft and farmers pull back on production. As a general rule of thumb, when cattle prices are bearish, farmers generally first look to market their steers first since their prices generally drop at a faster rate than cow prices. For example, steer prices dropped about 36 percent last year, while cow prices dropped almost 24 percent. If the downturn is longer than expected, as is the case right now, farmers start marketing their cows.

The slaughter number for 2011 has been revised upward to 853,000 head because weaker cattle prices spurred an increase in the number of animals being marketed during the second half of the year. Nearly 57 percent of cattle were slaughtered from Jul-Dec 2011, up 4 percentage points from the same time the previous year.

According the Korea Rural Economic Institute (KREI), a local agricultural think-tank, because of sagging cattle prices and relatively high feed costs, about 46 percent of the cattle slaughtered in 2011 resulted in the farmers losing money. These loss-generating animals were those that graded out at a 2 or 3, which is the lower end for quality grading scale. The remaining 54 percent of animals that yielded a profit received a grade of 1++, 1+ or 1.

Stocks:

Livestock industry experts are predicting that it will take 2-3 years before the drop in cattle prices is actually reflected in the total inventory numbers in part because Hanwoo semen sales, which are directly correlated with insemination rates, remained relatively strong through the end of 2011 even though prices were dropping. Nonetheless, ending inventories in 2012 are projected to decline from last year’s record to 3.25 million in large part because of the expected increase in slaughter. This decline, the first in more than a decade, signals the end of a long expansionary period in the local cattle sector.

Commodities: Meat, Beef and Veal

Production

With the expected increase in the number of animals going to slaughter, beef production in 2012 is projected to climb above the previous estimate to 355,000 MT. Similarly, the beef production forecast for 2011 is raised to 280,000 MT on account of the increase in animals marketed during the second half of the year.

Consumption

With the expected increase in production and ongoing promotional activities, the beef consumption estimate is raised slightly from the earlier forecast to 700,000, but up more than 5 percent year-on-year.

In a bid to increase consumption of domestic beef, two of the largest hypermarket chain stores – E-mart and Lotte Mart – continue to sell Hanwoo beef at discounted prices. Prospects for U.S. beef consumption remains high as the percentage of the consumers that have tried U.S. beef has increased from 22 percent in 2010 to 52 percent in 2012, according to a KREI survey. In addition, a separate KREI survey revealed that 41 percent of consumers said they would purchase less Australian beef when purchasing U.S. beef. Meanwhile, nearly 30 percent said they would cut back on Hanwoo beef consumption when purchasing U.S. beef.

In mid December 2011, USMEF kicked-off the second phase of its ‘To Trust’ campaign that profiled world-class U.S. beef in two different commercials which ran on all the major TV networks until the end of February 2012. USMEF will conduct surveys to gauge consumers’ responses, but initial impressions seem positive. These and other types of promotional activities are considered as the key ingredients to propel consumption of U.S. beef in years to come.

The most popular beef cut is short ribs. In January 2012, the average retail price for 500 grams of domestic #1 grade chilled short ribs cost 22,000 won per 500 grams ($19.50). In comparison, the same U.S. and Aussie chilled cut retailed for about half the price at 11,900 won ($10.60) and 10,695 won ($9.50) per 500 grams. The reason for the price difference between U.S. and Aussie short ribs is the price premium for grain feed beef; nearly all U.S. beef is grain feed while just 30 percent of Aussie beef is. See retail price series at end of beef section for more detail.

Trade:

In light of the anticipated increase in beef production, the 2012 beef import forecast has been trimmed to 400,000 MT, down 4 percent from the previous year. Imports of U.S. beef during this period are forecast to hold steady at 160,000 MT, accounting for 40 percent of total imports. The KOR-US FTA is not expected to have a significant impact on U.S. beef imports in 2012 since the tariff is only being reduced from 40 percent to 37.3 percent.

In 2011, beef imports climbed above the earlier estimate to 417,000 MT on the back of high domestic pork prices. Prior to FMD, domestic pork retail prices were about 1.3 times higher than frozen Australian beef, but jumped as high as 1.9 times and were still 1.7 times higher in December 2011. Imports of U.S. beef reached 157,000 MT during this period, accounting for about 38 percent of total imports. On a product weight basis, imports of U.S. beef totaled slightly more than 115,000 MT, valued at nearly $600 million.

Stocks:

Consumption was not commensurate with imports in 2011 resulting in a fair amount going into stocks. The GS&J research institute estimated that there was about 59,000 MT (PWE) of imported beef waiting to clear Customs at the end of 2011. Ending stocks for 2011 are accordingly revised upward to 80,000 MT (CWE).

March 2012

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