29 September 2011

12 minute read

Cattle

Production

Record cattle inventories posted over the last few years have started putting considerable downward pressure on live cattle and beef prices in recent months. Live Hanwoo steer prices have dropped more than 35 per cent since November of last year just before the FMD outbreaks, whereas retail prices for domestic beef have dropped around 20 per cent. See live cattle price series at end of cattle section for more detail.

In light of the price situation, there are early signs that some farmers are beginning to slow the pace of production. According to a June survey of local cattle growers, 94.8 per cent of cattle growers were planning to maintain on-farm inventories at current levels, whereas in December only 90.9 per cent of farmers were planning to hold their herd sizes steady. In addition, 1.7 per cent of growers said they were planning to cut production. Meanwhile, 3.5 per cent of cattle growers signaled interest in expanding numbers, which is down from 9 per cent last December.

Rising grain prices have not had a noticeable impact on cattle production since cattle prices, though down from record highs, still remain relatively strong. Average compound feed prices during the month of July were 536 won/kg, up about 15 per cent from the 2010 average of 468 won/kg.

In addition, semen sales from Jan-Feb were almost zero because of FMD-related movement restrictions. This significant drop in sales during these two months will push 2011 production downward since very few calves will be born in November and December of this year.

In addition, semen sales from Jan-Feb were almost zero because of FMD-related movement restrictions. This significant drop in sales during these two months will push 2011 production downward since very few calves will be born in November and December of this year.

Slaughter

The above-referenced cattle grower survey also reveals that there will not be a sudden rush to market animals in the near future. Based on these results and the number of animals sent to market during the first half of 2011, the slaughter estimate for 2011 has been lowered from 908,000 to 800,000 head.

However, the number of cattle to be marketed in 2012 is forecast to climb to 900,000 for two interrelated reasons. First, there are a sizeable number of animals in the pipeline, which were born in 2010 when farmers were rushing to expand herd sizes that will be ready for slaughter. Second, record inventories will continue to exert downward pressure on live cattle prices, prompting some farmers to slaughter their animals early.

In analyzing the slaughter data that follows below, it is evident that some farmers are looking at rebuilding their stocks. For example, the per centage of cows slaughtered during the first half this year was slightly less than 40 per cent, compared to the average of 45 per cent in 2010. Another factor behind farmers’ decision to retain a higher per centage of cows is the government’s calf price stabilisation programme, which kicks in when calf prices drop under 1.65 million won per head. In June, female and male calves were selling slightly above this trigger. Meanwhile, many of the FMD-affected farms are waiting to restock until live cattle prices stabilise.

In order to stabilise the sagging cattle market, the Ministry of Food, Agriculture, Forestry & Fisheries (MIFAFF) is encouraging farmers to reduce production and slaughter cows at an earlier age. Based on monthly slaughter data, farmers appear reluctant to market their animals earlier. Instead, they are asking for additional government compensation above and beyond the $3 billion that MIFAFF distributed during the FMD crisis.

Stocks

In light of the anticipated trends in production and slaughter, cattle inventories are forecast to reach a record 3.45 million head in 2012. It will probably take two to three years before total inventories start coming down since farmers were busy trying to expand production through most of 2010 in order to capture record profits. In addition to the various market factors at play, implementation of a livestock licensing system in 2012 will put downward pressure on annual production and year-end inventories.

Beef and Veal

Production

The Korean government and local think tanks hold competing views on the outlook for beef production over the next couple years. GS&J, a local think-tank that closely tracks the domestic livestock industry, is predicting that the market will see a soft landing as live cattle and beef prices begin to stabilise as consumers eat more beef. Meanwhile, the Korean government is bracing against further price drops and is urging farmers to gradually begin reducing their herd sizes by slaughtering more cows.

Post’s estimates are largely based on the idea that the market will experience a soft landing. Cattle prices are expected to continue their gradual downward descent, spurring increased production and consumption of domestic beef. As consumption begins to increase, cattle prices are in turn expected to stabilize.

As noted in the cattle section, slaughter estimate for 2011 was cut since there was no mad dash to market animals in response to falling cattle prices. Domestic beef production is therefore lowered 36,000 MT, or 12 per cent, to 262,000 MT. In 2012, beef production is set to increase to its highest point in more than a decade at 295,000 MT as 900,000 cattle are forecast to be slaughtered. This projection, however, is liable to change if the cattle prices plunge downward during the second half of 2011.

Consumption

The daily press reports with disturbing footage during the FMD crisis initially caused some consumers to shy away from beef (and pork). However, thanks in large part to local producer groups’ promotional activities, total beef consumption in 2011 is forecast to hold at 660,000 MT, an 8 per cent year-over-year increase. The recent promotional activities, which are briefly described below, are aimed at stabilizing live cattle prices by generating more demand for local beef.

For the last two months (Jun-Aug), the National Agricultural Cooperative Federation (NACF) has sold Hanwoo Bulgogi cuts, made-up of mostly Chuck roll, at a 50 per cent discount. Meanwhile, the National Hanwoo Association sold Hanwoo beef at a 20 per cent discount in July. In addition to these activities, the Korean government has announced plans to sell 30,000 Hanwoo carcasses at discounted prices later this year depending on the local market situation.

The longer and heavier than usual rainy season had a bit of a dampening effect on beef (and pork) consumption. However, this downward impact will be offset by increased demand during the upcoming Chuseok holiday season (11-13 September 2011) since there are few alternative traditional gift items from which to choose. Local fruit is in short supply because of the poor weather during the growing season and customers are wary of eating imported Japanese fishery products because of radiation fears.

In consideration of the above-mentioned factors along with increased domestic production, beef consumption is forecast to grow from 660,000 MT in 2011 to 690,000 MT in 2012. Beyond 2012, consumption is expected to flatten as more domestic pork returns to the market.

Trade

Beef imports surged during the first half of 2011 as traders anticipated a shortage of domestic pork resulting from the wide scale FMD-related culling and the rising consumer confidence in US beef. Importers, however, have since slowed down making contracts for the remainder of 2011 as the market tries to absorb the influx of imported beef. The earlier prediction that imported beef would substitute the bulk of the domestic pork shortage turned out to be only partially true as poultry meat consumption took off.

Beef imports are therefore forecast to hold steady at the previous estimate of 400,000 MT (CWE) in 2011. The US beef import forecast is raised to 140,000 MT based on strong sales to date. US beef is expected to account for 35 per cent of total imports in 2011. Given the anticipated increase in domestic beef production in 2012, imports are forecast to rise slightly to 410,000 MT. Imports of US beef are likewise forecast to grow marginally to 150,000 MT, representing 37 per cent of total imports.

In August 2011, a major television network carried a story about how imported US beef was being mislabeled as Australian beef. Restaurant and butcher shop owners who were interviewed claimed that they were labeling US beef as Australian, which is against the law, in order to sell the meat at a higher margin since Aussie beef was said to be more expensive. They also said they were putting on the wrong labels so as avoid scaring off any consumers who might still be reluctant to eat US beef.

However, the price argument is weak since many US beef cuts are more expensive than the same Aussie cuts. For example, chilled US beef short ribs, which are the most popular beef cut in Korea, were selling for around 29,000 won/kg at retail outlets in July, while the same Aussie cut was going for roughly 17,600 won/kg.

Instead, the fear that some consumers will not purchase US beef seems to be the main driver behind some proprietors’ decision to mislabel the product as Australian. It should be noted here that this activity is mainly limited to the mom-and-pop style operations since the Korean government has a number of overlapping mechanisms to prevent this type of mislabeling from occurring. One of the most recently-implemented systems was the beef traceability system, which in the case of imports tracks the shipment from arrival to retail. More details on beef traceability are available in KS1033.

On 27 June 2011, Korea announced that it had finished technical negotiations with Canada to resume imports of Canadian beef. The protocol is currently in the National Assembly and is pending deliberation. The first shipments could begin as early as December.

Swine

Production

The swine and pork sector were hit the hardest by the FMD outbreaks with over 3.4 million pigs, or one-third of total inventories, culled. The industry is steadily rebuilding, encouraged by record high domestic pork prices. As seen from the following table, sow inventories have increased 61,000 in just three months, from Mar-Jun. At this same rate, the industry will be able to add another 120,000 sows by the end of 2011. An additional 31,000 sows could be added to this figure under the duty free tariff rate quota (TRQ).

As explained in the cattle section, compound feed prices as of July are up roughly 15 per cent from last year’s annual average. Higher-priced feed, however, has not discouraged farmers from re-building their herds since swine and pork prices are at record levels.

Given the rapid increase in sow inventories, the 2011 production estimate has been raised to 12.1 million. The recovery is expected to carry on into 2012 with production estimated at 14.6 million, just slightly below pre-FMD levels. However, as explained in more detail below, production beyond 2012 will likely flatten because of disease management and livestock waste disposal requirements, as well as greater volumes of imported pork resulting from the EU-ROK FTA and the pending US-ROK FTA.

Slaughter

Slaughter numbers for 2011 are adjusted upwards to 11 million in order to reflect increased piglet production. Likewise in 2012, increased production will result in more pigs going to market. Pig slaughter is forecast at 13.3 million in 2012, up more than 2 million from the previous year.

Stocks

In 2012, swine farmers will continue to increase herd sizes. However, it is unlikely that total inventories will reach levels prior to the FMD outbreak for the following four reasons:

1. In the wake of the FMD crisis, the Korean government established minimum barn space requirements in order to prevent the rapid spread of livestock diseases. The minimum space for sows and porkers is 1.4 square meters and 0.8 square meters, respectively. For more details, please refer to KS1128.



2. After the FMD clean-up was finished, many regional governments imposed a minimum distance requirement for swine farms located in proximity to residential areas. Farms in operation prior to this law went into effect are exempt until they re-populate. Residents want these nearby farms to shut-down.



3. Disposal of livestock manure in the open sea will be prohibited starting in 1 January 2012. Farms without access to manure treatment facilities will be prohibited from raising livestock.



4. In the next two to three years as Korea rebuilds its swine herd, the EU-ROK FTA, which was implemented on 1 July 2011, and the pending US-ROK FTA are expected to put downward pressure on local production and inventories.

Pig Meat

Production

The 2011 pork production forecast has been revised upward to 835,000 MT to reflect the industry’s fast-paced recovery. Similarly, domestic pork production in 2012 is projected to increase to 1.0 million MT, which is just slightly below pre-FMD levels.

The shortage of domestic pork has caused prices to skyrocket, breaking all past records. Average retail pork prices have jumped 40 per cent since November with prices hovering 24,000 won/kg as of July. Meanwhile, average carcass prices have climbed more than 65 per cent during this period with prices in July above 6,500 won/kg. According to the Korea Rural Economic Institute (KREI), a local agricultural think-tank, carcass prices will gradually start coming down after the summer picnic season, but will remain around 5,000~5,300 won/kg until the end of 2011. Although down, the predicted price level is still above historical averages, which will be an important factor in driving future domestic pork production.

Consumption

As domestic production increases, pork consumption is forecast to recover slightly to 1.43 million MT in 2011. Consumption is expected to continue its upward advance in 2012 with consumption climbing to 1.55 million MT, which is on par with consumption levels prior to the FMD crisis.

The current shortage in domestic pork, coupled with high pork prices, is pushing consumers to other meat proteins such as poultry, fish and imported red meats. The top alternatives were chicken (36 per cent) followed by Hanwoo beef (17.9 per cent), according to a KREI survey done in July.

KREI also conducts a regular survey to see where consumers are eating pork. Although more recent survey results are unavailable, the survey shows that 59 per cent of pork consumption occurred at restaurants, which would be a mix of both domestic and imported pork. Home consumption, which is made-up of more than 70 per cent domestic pork, is gradually trending downward in part because of the time consuming clean-up. This growing trend towards restaurant consumption will keep demand strong for imported pork.

US pork is set to account for 14 per cent of consumption in 2011. In 2012, this per centage is forecast to slacken to 11 per cent, but will still be above the pre-FMD level of 6 per cent. In order to build market share, USMEF started to aggressively promote US pork on a radio programme that started 1 August 2011. However, it is still too early to tell how this outreach might boost US pork sales and market share.

Trade

In attempts to curb rising pork prices, the Korean government has announced a number of special zero duty tariff-rate-quotas (TRQ) for selected pork imports for 2011. Most of the TRQ for processing cuts has been filled. However, the quota for chilled pork bellies is far from being filled since the trade reports that international supplies of this particular cut are limited. The following table provides a summary of all of the TRQ announcements to date.

As domestic production picks up steam, pork imports during the second half of 2011 are projected to soften. The 2011 import estimate has accordingly been trimmed back to 580,000 MT. Imports of US pork during this period are forecast to double from the previous year (2010), reaching 200,000 MT. In 2012, imports are expected to decline to 490,000 MT with imports of US pork slipping to 170,000 MT.

Further Reading

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