2 December 2011

17 minute read

Report Highlights:

From January to June 2011, American beef imports surged up 50 percent from the previous year, testifying to Japan’s strong demand. Japan's overall beef market consumption is expected to improve from the previous year’s slump in 2012 as consumer anxieties over food safety incidents (E-coli poisoning and cesium detection in beef) subside and the distribution of domestic beef is normalized. The pork market is expected to sustain a relatively high level consumption. However, the anticipated recovery of domestic pork production is expected to curtail the import outlook for the year.

Preface

Previous semiannual outlook numbers for 2011 have been adjusted to reflect first half data for annual cattle (beef) and swine (pork) production, trade and monthly ending stocks, and year beginning livestock inventory publicized by the government. (See JA1005 dated March 4, 2011, Japan Livestock Semiannual Report)

In compiling the demand and supply outlook and forecast numbers for CY 2012, Post applied the following assumptions:

- No changes to Japan’s Export Verification (EV) Program for U.S. beef, thus continuing to limit the market access for U.S beef

- A lack of positive income growth, keeping average consumers to remain low-price seeking

Quantities listed in the text are made on the basis of Carcass Weight Equivalent – CWE (unless specified otherwise). Some numbers in the inserted tables are on a product weight basis and have not been converted to CWE.

Rates of conversion from product weight to CWE are:
Beef Cuts (Boneless) – 1.40
Pork Cuts (Boneless) – 1.30
Processed/Prepared Beef Products – 1.79
Processed/Prepared Pork Products – 1.30

Executive Summary

The beef market will remain a difficult environment for high priced domestic beef. Overall market consumption in 2012 is expected to improve from the previous year’s slump as market anxieties over several food safety incidents (E-coli poisoning and cesium detection in beef) subside and the distribution of domestic beef is normalized after the disruption from the March 2011 Earthquake. While the total imports of beef cuts for 2012 are projected to remain constant with the previous year at 707,000 MT, a strong market preference for affordably priced grain fed beef is supporting a modest growth outlook for American imports, projected up by only five percent.

In 2012, the pork market is expected to sustain a relatively high level consumption. The anticipated recovery of domestic pork production is expected to curtail the import outlook for the year, projected slightly down to 1.222 million MT especially affecting the chilled pork trade. Although imports from the United States are also projected lower, it will retain its sizable share as Japan’s top pork supplier for both pork cuts and the prepared and processed products.

2012 Beef Market Outlook (New)

- Domestic Beef Production to Lower Slightly in 2012

By the end of 2012, Japanese cattle farmers are expected to resume normal operations after the challenges caused both by the earthquake and tsunami that occurred in the Tohoku and Kanto regions in March 2011 (See note at the bottom of this section). However, the continued decline in the number of beef calves born for the past couple of years is still pointing towards a slightly lower level than the previous year’s cattle slaughter, and therefore the beef production number for the year is projected down by one percent to 500,000 MT (or total slaughter of 1.18 million heads). In addition, the continued exit out of cattle farms, shrinking dairy operations, and aging farming cattle growers who lack successors, particularly for small scale Wagyu cow calf rearing operations, will remain as medium and long term supply constraints.

- Modest Total Beef Consumption Recovery Projected for 2012

Japanese total beef consumption in 2012 is expected to increase from its 2011 decline to recover to 2.233 million MT, a two percent increase from the previous year. This projected increase will primarily be achieved by increased distribution of domestic beef as the previous year’s carried over stocks run down.

No significant economic growth is expected in 2012, thus the market will generally remain difficult for high priced food items, including Wagyu beef. A real challenge that the market will face appears to be how to enhance the supply of more affordably priced medium grade grain fed beef in order to improve the overall consumption environment toward a genuine recovery. With the current production and market structure, it appears hard for domestic beef cattle farmers to shift their long held fattening practices of producing highly fat marbled and high value beef in order to meet the potential demand for medium grade beef. Therefore, prospective import demand for grain fed beef seems to be great in 2012. The legitimate constraint will be limited market access due to Japan’s continued imposition of the EV program for American beef.

Due to the above challenges faced by Japan, the market demand for American grain fed cuts has been growing in recent years, partially assisted by a strong JP Yen against the U.S. dollar, as well as greater marketing efforts by the U.S. Meat Export Federation (USMEF) and its Japanese end user clients to restore consumer confidence. Increasing numbers of retailers and food service companies have reportedly been resuming sales of American beef for the past several years. This trend will most likely continue in 2012. Market anxieties due to recent food safety concerns caused by a series of incidents (such as food poisoning caused by E-coli tainted raw beef dish and cesium detection in beef) are not expected to be carried through to 2012 since various risk mitigation measures taken by the government appear to be working effectively.

- Total Imports to Stay Flat in 2012

Japan’s total beef imports are projected to roughly sustain last year’s level at 725,000 MT (Beef Cuts: unchanged at 707,000 MT, Processed and Prepared Products: unchanged at 18,000 MT). Following last year’s trend, American beef is expected to continue its inroads into the market (projected up by five percent to 161,000 MT) in 2012, despite the EV access limitation. For this to occur, a slight decrease in currently predominant Aussie beef for 2012 is projected with its share in total beef imports (total beef cuts) slipping slightly to 66 percent. This projection is fairly preliminary since it is uncertain at this time if the 2012 pricing situation will continue to favor American beef, as in the previous year. If Asian demand for beef continues to grow, 2012 international beef prices could strengthen further which would in turn make the availability of low-priced grain fed cuts preferred in this market somewhat tight due to competition.

(Note: The major issue for both the government and the affected livestock growers and industry was to promptly secure the feed supply for the devastated regions. At the end of June 2011, production and distribution of formula mixed feeds in the country have reportedly recovered close to their average year level. Partially incapacitated feed mills/grain elevators located in the Pacific coastal area have been repaired and are back in operation, except for those that were completely destroyed. A back-up feed supply for the affected region has been quickly secured by restoring the transportation infrastructure as well as diverting distribution channels to bring needed feeds from other regions.

A major food poisoning incident in a raw-beef dish occurred in May 2011, killing several people, including children, and hospitalizing others. The incident caused the sales of many barbecue chains in the country to fall temporarily.

While the effects of the above incident continue to linger, cesium detection in beef in July became the major food safety issue of the year, creating widespread public concern, which caused overall beef consumption in the country to slump. Unfortunately, the incident occurred just as the livestock sector in the earthquake devastated regions had begun returning to their normal operations.

The first Fukushima cattle incident was detected by the government’s regular radiation monitoring on foods. Further tracing (by using the individual cattle I.D. traceability system) and testing revealed that relatively large numbers of cattle had actually been fed with contaminated rice straw. As of August 24, over 4,400 heads were found to have been sent for slaughter and already sold, including some which was consumed. This has caused immense public anxiety and confusion in the market, specifically about the testing of animals. Of the above total, beef (or carcasses) from over 1,000 heads have been tested and only 74 heads were found to be contaminated with cesium exceeding the government’s permissible level for foods (500 Bq/kg). Cattle fed with contaminated rice straw have so far been found in 15 prefectures, including those in the Tohoku and Kanto regions. This is mainly due to the fact that contaminated rice straw was either produced locally and fed to animals within the prefecture or marketed to cattle farms in other prefectures through rice straw distributers. A majority of the contaminated straw-fed animals were shipped from four prefectures (Miyagi, Fukushima, Iwate, and Tochigi) in the Tohoku and Kanto regions. In July, the government placed these four prefectures under a temporary shipment suspension order, but on August 25, lifted this suspension based on a testing plan and feed control measure by each prefecture. Beef cattle raised in these four prefectures represented about 13 percent of Japan’s total 1.22 million heads shipped for slaughter in 2009. Although blanket testing is not mandated, many of the affected prefectures, as well as individual business entities (retails, food services) are reported to be initially arranging the screening and testing of beef for radiation at slaughter facilities and at distribution before shipment and sales.

These actions, despite questions on feasibility and actual necessity, are primarily in response to extreme marketing difficulties. However, the testing protocol announced by the four prefectures were more in line with a guideline recommended by the Ministry of Heath to test all animals that were raised on farms that used contaminated rice straw and to test at one animal per farm, if raised on farms that did not use contaminated rice straw.

The measures introduced by Ministry of Agriculture and Forestry and Fisheries (MAFF) in response to the incident so far are: as a primary response, tracing, testing and segregating beef/carcasses from animals fed with contaminated rice straws from the market, and baring all storage and handling costs to the meat industry; and as a secondary response, assisting each prefecture’s plan for radiation testing, baring costs incurred by prefectural meat council to buyout live animals coming to finishing age in the above four suspended prefectures (at an artificial average wholesale carcass auction price prevailed before the earthquake), providing low interest loans for cattle farmers to arrange extra feeding costs, and paying a lump sum of JP Yen 50,000 per head to all cattle farms in the 15 prefectures. All costs of this repayment program, currently estimated to be over JP 80 billion Yen, are to be paid later by the Tokyo Electric Power Company, owner of the Fukushima Daiichi Nuclear Power Plant which was responsible for the amounts of radioactive materials that contaminated the Kanto and Tohoku regions.

2011 Beef Market Situation Update and Revised Outlook (New)

- Food Poisoning Incident and Cesium Detection in Beef to Cause Consumption Slump in 2011

The positive consumption outlook for beef, projected at one percent growth in the last semiannual report (JA1005 dated March 4, 2011), has been reversed due to a series of food safety incidents in domestic product. These incidents practically turned this year’s outlook negative, especially in the second half (see detailed note at the bottom of the previous 2012 outlook section). The nuclear accident at the Fukushima Daiichi Nuclear Power Plant led to radiation contamination in a wide variety of field-grown vegetables and fruits, pasture for fodder, milk, and beef. A July detection of cesium in domestic beef has temporarily put Japan’s beef consumption, both domestic, as well as imported, into an overall slump. With growing market anxieties prevailing since the July detection, it is increasingly likely that Japan’s annual total beef consumption in 2011 will slip slightly from the previous year, and is now projected down by one percent to an estimated 1.208 million MT. For January – June, Japanese household consumption of beef was flat (See supplement table I-a, and I-b). Food service demand for beef was reportedly lethargic as consumers refrained from eating out after the earthquake. Also, sales of barbecue chains reportedly dipped over the May food poisoning incident. Consequently, market prices of domestic beef have weakened and monthly ending stocks have reportedly been on the rise in the second half, which made Post’s estimate of this year’s ending stock to climb, up by 17 percent from the year beginning at 151,000 MT (See supplement table III-a, IV-a).

- Total Domestic Beef Production to Decline in 2011

A slight decline previously forecasted for Japan’s total beef production (down one percent) has now been revised and reduced even further, with a projected fall of two percent to 505,000 MT (or total slaughter of 1.195 million heads). Reduced cattle coming to finishing age and stalled shipments of cattle for slaughter in the incident-affected regions since July were taken into account for this revision. Recently publicized livestock inventory data by MAFF is also suggesting that Japan’s beef cattle sector will continue to contract, marking a four percent drop for the number of beef cattle raised at the year beginning of 2011 at 2.763 million heads (See supplement table VI).

- Total Imports to Rise Only Modestly in 2011

For 2011, Japan’s total beef imports are projected to grow only by one percent from the previous year to 725,000 MT mainly capped by a slowdown in overall consumption and soaring import prices (Beef Cuts: up by one percent to 707,000 MT, and Prepared/Processed Products, down by 17 percent to 18,000 MT). According to several trade sources, a specific issue with imports is more to do with soaring import prices, therefore a possible slowdown may occur in the second half of 2011 which could effectively erase the first half gain. For January – June in 2011, Japanese beef imports (total beef cuts) rose five percent from a year before to 336,354 MT. American beef surged, up 50 percent from last year, to 87,856 MT (average CIF price, up a modest six percent at USD 5,710 per MT) while Aussie beef fell five percent at 224,337 MT (average CIF price, up 15 percent at USD 5,036 per MT compared to the same period last year). Aussie beef prices have been increasing since 2010 and soared further in the first half of 2011 (See table 1, table 2-a, 2-b, 2-c, 2-d and 2-e). Although cheaper than American imports, current Australian offers have not been attractive to Japanese importers who claim that the price level does not match the quality offered.

On an annual basis, it appears difficult for American beef in 2011 to sustain the pace it achieved in the first half, which was reportedly affected by rising U.S. offer prices, coupled with lower availability of EV qualified cattle for Japan (20 months of age or below) that occurs for the Fall and Winter seasons. Post is projecting Japanese imports of American beef in 2011 to grow by roughly 20 percent, reaching a 2006 record of 154,000 MT with its share expanded to 22 percent, a four percent gain from the previous year. However, due to the earlier-mentioned concerns on offer versus quality, Japanese imports of Aussie beef in 2011 are projected down by three percent to 476,000 MT with its share in the total imports (total beef cuts) to slip by three points to 67 percent.

Not reflected in the PS&D table, Japan’s first half edible offal imports (tongue, liver, and intestines) also outpaced the previous year level, up 18 percent with the imports from the United States jumping by 47 percent. However, these offal imports are expected to slow in the second half partially affected by the sales slowdown occurring in the barbecue restaurant chains.

2012 Pork Market Outlook (New)

- Rebounding Domestic Pork Supply to Modestly Cut Imports in 2012

Japan’s total pork consumption in 2012 is projected to hold steady at a relatively high level. However, an improved beef market outlook may become a factor, trimming pork consumption slightly in 2012, thus the level is projected marginally lower from the previous year at 2.501 million MT given relatively stable demand projected in the household, food service, and processing sectors.

Total pork production in 2012 is projected up by two percent to 1.28 million MT (or total slaughter of 16.6 million heads) rebounding from the decline that was forecasted for the previous year, reflecting the rebuilding of sow inventories in major swine production regions, namely Kyushu, Kanto, and Tohoku (See the 2011 Situation Summary and Revised Outlook Section), where 60 percent of the nation’s hogs are raised.

However, in 2012, this anticipated increase of domestic pork supply is expected to curtail imports, which is projected down by one percent from the previous year to 1.222 million MT (Pork Cuts: down by one percent to one million MT and Prepared/Processed Products: unchanged at 221,000 MT). Increased distribution of domestic pork cuts priced lower than last year will likely give a better presence to fresh domestic cuts, recapturing some of its retail share lost to the imported chilled cuts, possibly impacting the sales of American and Canadian chilled cuts in 2012.

The United States will stay as Japan’s top pork supplier claiming an estimated share in the total imports at 39 percent (pork cuts) and at 65 percent (prepared and processed products, mostly seasoned ground pork), which were unchanged from the previous year.

2011 Pork Market Situation Update and Revised Outlook (New)

- High Level Demand for Pork to Continue in 2011

At this time, the market situation suggests another good year for pork in 2011. The total consumption estimate is raised slightly from Post’s previous semiannual outlook forecast and is now projected to reach a seven year high of 2.50 million MT. This projected increase is largely based on a modest rise in anticipated Japanese retail demand for pork, particularly helped by modest growth in the household consumption of pork, as well as processed products which are expected to sustain through the year while holding food service and processing utilization relatively constant.

More Japanese retail and food service users have been turning to imported chilled cuts as an alternative source of supply due to the reduced distribution of domestic fresh/chilled cuts that occurred in the first half of 2011. For Jan. – Jun of 2011, Japanese household consumption of pork and processed products were; pork (up three percent), ground meat (unchanged), ham (up three percent), sausage (down two percent) and bacon (up three percent), beef (unchanged), chicken (down seven percent). The latest manufacturing data for first half processed meat product production was reportedly up 1.5 percent. No positive outlook has been generated from the sluggishly performing food service sector which has been hard hit by the continued economic slump, as well as the earthquake (See supplement tables I-a, I-b). With the reported overall consumption slowdown for red meat and poultry (broiler meat) entering into the second half of the year, the above gain for first half total consumption could be moderately offset on an annual basis. USMEF promotion activities have been effective in educating Japanese users/consumers to the appealing and competitive qualities of American chilled pork.

- Domestic Pork Outputs to Lower, Resulting in Higher Prices in 2011

In this report, Post’s previous projection for slightly lower national pork outputs in 2011 made in the last semiannual report has been revised and is now projected to be even lower, down by three percent to 1.255 million MT. The above revision is based on recently publicized sow inventory data by MAFF, which was also down at the same rate of 901,000 heads. The number of hogs raised in the nation at the year’s beginning was also down at 8.186 million heads (See supplement table VI). The above registered decline in the national sow and hog inventory data is attributed to the following factors; i.e. 1) reduced farrowing rate negatively affected by a long and severe hot summer in 2010, 2) slower than anticipated recovery of swine inventories in the Miyazaki prefecture, the nation’s second largest hog producing state, after the massive Foot and Mouse Disease (FMD) outbreak in 2010, and 3) temporarily stalled hog production and slaughter in the Tohoku and Kanto regions due to the earthquake this year. In the Tokyo market, tight supplies of domestic pork have caused average wholesale market prices of domestic hog carcasses to strengthen during the first half (Excellent grade - up eight percent at JP Yen 486, Medium grade: up 10 percent at JP Yen 450). Likewise, wholesale prices of pork cuts have been higher than the last year, making already low-priced imported chilled cuts even more competitive and attractive, partially eroding the predominant share held by domestic fresh cuts in the retail sector (See supplement tables V-a, V-b).

- Imported Chilled Pork to Increase Market Presence in 2011

The prevailing situation has been providing a good market opportunity for the United States and Canada, two major chilled pork suppliers to Japan, to advance their share and presence. On the other hand, Japan’s processing demand for imported frozen raw material cuts, are expected not to be significantly high for the previous six months and instead, processing demand has been met by existing stock run down (See supplement table III-b).

Based on the above information and first half results, Japan’s total pork imports in 2011 are projected to grow by two percent from last year to reach around 1.235 million MT (Pork Cuts: up four percent to 1.014 million MT, and Prepared and Processed Products: down three percent to 221,000 MT). Moderately lower year ending stocks are also forecasted, down by seven percent to an estimated 202,000 MT. For Jan. – Jun, total pork imports were up three percent from the previous year at 512,703 MT (Chilled cuts: up 12 percent at 163,023 MT, Frozen Cuts: down two percent at 349,681 MT). Imports of prepared and processed products in the same period were up only one percent at 110,258 MT. However, not reflected in the PS&D table, Japan’s fast growing sausage imports in recent years appears to have slowed in the first half, down one percent at 20,992 MT on customs clearance basis, most probably affected by the sluggish food service performance (See table 3-a, 3-b, 3-c, 3-d and table 4). While appreciating the first half result, trade sources are predicting that the growth pace of chilled cuts may not hold with a surplus risk and market price deterioration in case the current level import exceeding 20,000 MT per month were to last. For specific products, loin items are estimated to be already somewhat oversupplied and belly is in short supply and has good demand.

Further Reading

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December 2011