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USDA GAIN: Livestock and Products

09 October 2012

USDA GAIN: Japan Livestock and Products Annual 2012USDA GAIN: Japan Livestock and Products Annual 2012

Japan’s 2013 beef market is projected to grow modestly assuming limited market access under the Export Verification program continues. Increased imports are anticipated to offset a decline in national beef output. A proposed relaxation of Japan’s import requirements will likely increase market access for American beef. However, high U.S. beef prices, due to the combination of historically low cattle numbers and soaring feed grain prices may limit potential increases in quantities demanded by Japan for import.

USDA GAIN: Livestock and Products

2013 Beef Market Outlook

Total Consumption and Imports to Increase Slightly in 2013

For 2013, Post expects Japanese consumers to continue to be low-price seeking and value-conscious. Overall market demand for expensive domestic beef will most likely remain lethargic. However, Japan’s demand for imported beef, especially for American beef (value cuts such as plate, chuck, and clod) will remain solid if U.S. price offers remain at stable levels through the year.

High prices for American Beef May Trim Japan’s Prospective Import Demand in 2013

Recently, prices for high-demand American beef cuts have been rising in Japan. Additionally, the preliminary price outlook for American beef in 2013 is expected to remain high, reflecting historically small U.S. beef cattle inventories and the impact of the severe drought on feed grain prices. Any significant rise in U.S. offers in 2013 could effectively weaken the competitive edge that American beef has demonstrated against Australian beef over the past several years.

On a preliminary basis, Post projects stable growth for the Japanese beef market in 2013 with total consumption likely to grow by one percent to 1.258 million MT, and total imports to rise by two percent to 760,000 MT. Increased imports should fill a supply gap that is expected to occur due to an anticipated decline in domestic beef output, projected to be down by three percent to 495,000 MT. Breakdowns for 2013 imports are; for beef cuts, up by two percent at 742,000 MT, and unchanged for prepared/processed beef products at 18,000 MT. Post’s import projection for beef cuts by country are: up five percent to 182,000 MT for American beef, down two percent for Australian beef at 448,000 MT, with market shares for both countries at 26 percent and 42 percent respectively.

Japan’s National Beef Output Forecast to Fall in 2013

Japan’s total 2013 domestic slaughter and national beef output is projected to decline by three percent from the previous year to 1,155 million head (or 495,000 MT). This drop has been indicated by reduced numbers of Wagyu, Holstein and F1 calf crops from 2010/2011 that are expected to reach their finishing ages in 2013. A seven percent drop in 2011 Wagyu calf inventory suggests a possible liquidation of stocks by Wagyu breeders in the wake of the uncertainties in cattle futures that occurred during that time (including Foot and Mouth Disease [FMD] outbreaks in 2010, a food poisoning incident in 2011, and plummeting market prices caused by radiation contamination from the Fukushima nuclear plant accident in March 2011). (See JA 1008 Livestock and Products Semi-annual dated April 10, 2012) Consecutive declines in 2010-2011 of dairy cow beginning stocks have also resulted in lower dairy calf crops (including cross F1 calves).

2013 Pork Market Outlook

Competition between Low-Priced Domestic Pork and Imported Chilled Pork to Intensify in 2013

Although overall market demand for pork has been at a high level over the past few years, Japanese pork consumption started to trend moderately downward in 2012 which may continue into 2013. Despite this, imported chilled pork, which is mainly supplied by the United States and Canada, is expected to sustain its 2012 level, as long as its competitive price advantage over domestic pork prevails. A recovery in 2012 in Japan’s total hog slaughter and national output has put more competitively priced fresh/chilled domestic cuts into retail distribution, and this trend is expected to continue into 2013. As noted above in Executive Summary section, if Japan decides to relax its domestic BSE border measures, including those for imports, it may prompt Japanese retailers, who were compelled to feature more pork and Australian beef in their store shelves after 2003, to switch back to competitively priced American beef cuts. For example, American sliced short plate pack used to be the most popular barbecue meat with Japanese consumers. This may have an impact on the 2013 pork market outlook as well, especially for retail sales of domestic pork and imported chilled cuts.

In 2013, imports of frozen pork for processing use will continue to be subject to enhanced monitoring and inspection to enforce Japan’s pork differential duty system – the so-called Gate Price System. This increased focus in inspections may lead to an exit of brokers, which in turn may reduce speculative imports of cheap frozen cuts which have kept year ending stocks somewhat high in the past.

For 2013, Post projects total consumption in Japan’s pork market to decline by one percent to 2.484 million MT, and total imports to contract by two percent to 1.208 million MT, due mainly to an anticipated reduction in frozen pork imports. Therefore, year ending stocks are adjusted three percent lower compared with the year beginning level and is now estimated at 210,000 MT. Breakdowns for 2013 imports are: for pork cuts, down by two percent at 974,000 MT, and down by three percent for prepared/processed beef products at 234,000 MT. Post’s import projections for pork cuts by country are: the United States, down by two percent to 410,000 MT, Canada, unchanged at 208,000 MT with each country’s respective share at 42 percent and 21 percent. Combined total imports of frozen cuts from Denmark/EU countries are projected to be somewhat lower than 2012. The United States and Canada should hold the majority share of Japan’s imports of seasoned ground pork (in the prepared and processed products category). At these projected levels of pork cut imports and stocks, the pork safeguard is not expected to be triggered in 2013.

Slight Fall Projected for Japan’s National Pork Output in 2013

Constrained by low market prices, increased competition with imported chilled pork, and higher feed costs, Japan’s total 2013 domestic slaughter and national pork output are projected down by less than one percent to 16.4 million head (or 1.27 million MT). In light of the above, year-beginning total domestic sow numbers are projected to decline, reflecting an anticipated liquidation of some sow stocks.

Brazil May Become a Frozen Pork Supplier in 2013

In August 2012, Japan classified the South Catarina (SC) state in Brazil as a FMD vaccination free region, potentially allowing Brazil to begin supplying frozen raw material pork. An animal health protocol and certification requirements are currently being negotiated, and if these are concluded by 2013, the SC state could begin exporting in the same year. Initial trade volume from SC is expected to be small, and Brazil will likely be competing for a portion of the market that is currently held by Mexico and Chile (approximately nine percent in total pork imports in 2011).

2012 Revised Market Outlook

Based on recently publicized preliminary 2012 data, Post had made adjustments to the 2012 PS&D numbers to this year’s semi-annual beef and pork forecast (JA 1008 dated April 10, 2012).

Overall 2012 Market Situation Summary

Surplus Supplies of Broiler Meat to Cap Beef and Pork Consumption Growth in 2012

Although not previously anticipated (See JA 2022 Japan Poultry and Products Annual dated September 1, 2012), a surplus in Japanese broiler meat helped limit overall 2012 beef and pork consumption growth. In the first half of 2012, abundant stocks of low-priced domestic chicken meat reportedly displaced retail purchases of both beef and pork (for table consumption). This effect can be seen in Japan’s average household meat and poultry consumption data for the first half of 2012, where sales of fresh/chilled beef and pork showed almost no growth compared to the same period last year, while a significant 14 percent increase for sales of chicken meat occurred during this time (see Table 1). In the same period, wholesale market prices for domestic beef and pork slumped, suggesting weak demand for comparably high priced domestic meat. High stocks of chicken have also slowed imported chilled meat, but not to the same extent as domestic fresh/chilled beef and pork. (See Tables 4-A, 4-B, 5-A, 5-B and 5-C).

The current recovery in monthly wholesale prices for domestic beef seems to indicate that the public concern regarding last year’s cesium contamination may be diminishing. Sales may pick up at the end of the year, a peak demand season for domestic beef, supported by increased supply and lower than average market prices that are anticipated to last through the end of this year.

During the first half of 2012, Japan’s food service sector (including take-out and ready-to-eat meal segments) also increased its use of low-priced (mostly imported) broiler meat at the expense of beef and pork cuts/products. A popular on-going food service strategy is to take advantage of the increased availability of low priced broiler meat, regardless of its origin, and to increase sales through special sales campaigns. For example, a major hamburger chain has been promoting chicken burger dishes, reportedly affecting the sales of its regular hamburger menu items. Trade sources are not overly optimistic about a quick turnaround for beef and pork consumption growth for the remainder of 2012.

2012 Beef Market Outlook (Revised)

Slight Growth in Total Beef Consumption Projected in 2012

In light of the above, Post has revised its 2012 beef market outlook for Japan, with total consumption now expected to grow by less than one percent to 1.248 million MT, partially absorbing an anticipated recovery in national output. Total imports are expected to remain at the previous year’s level at 746,000 MT. Breakdowns are: for beef cuts, up by one percent to 728,000 MT, for prepared/processed beef products, down by 17 percent to 18,000 MT. Based on first half 2012 sales, American beef is expected to continue to displace Australian beef this year. Year-to-date Australian beef export data (Jan – July, 2012) indicate a significant drop in exports of frozen short fed cuts (down 25 percent) and some chilled grass fed cuts (down 10 percent), largely due to a market preference for American fed beef (see Table 2, 7-A, 7-B, 7-C and 7-D).

Japan’s Demand for American Beef in 2012 to Remain Stable

Trade sources confirm that the growing popularity of American beef is not just limited to relatively lower value cuts, such as chuck, clod and plate (mainly for barbecue beef bowls), but also high value loins, which cater to more upscale hotels/restaurants. Post’s newly revised 2012 import projections by country are: for beef cuts, a 10 percent increase for American beef at 186,000 MT and a four percent decrease for Australian beef at 455,000 MT, with each country’s respective share at 26 percent (up three points from the previous year) and 60 percent (down three points from the previous year).

However, the severe drought in the United States and high grain prices have prompted concerns in the Japanese meat trade industry about the potential for an increase in price and/or a decline in quality for American beef.

Slight Recovery of Japan’s National Beef Output Forecast in 2012

Japan’s total domestic beef cattle slaughter and national output showed a modest recovery in the first half of 2012. On an annualized basis, Post projects total slaughter to rise by one percent at 1.185 million head (or 508,000 MT) based on the number of calves born in 2010/2011 that are reaching their finishing age this year. Increased slaughter of Wagyu will likely offset reduced slaughter of dairy breeds (Holstein and F-1 cross breeds). [Note: Average finishing age of beef cattle in Japan are: Wagyu steers /heifers (around 30 months), Holstein steers (around 20 months), F-1 cross bred steers and heifers (around 24 months)]

2012 Pork Market Outlook (Revised)

Total Pork Consumption to Slip Slightly in 2012

Post also revised Japan’s 2012 pork market outlook with total consumption expected to slip one percent to 2.501 million MT, and total imports to decline by two percent to 1.228 million MT. Breakdowns are: for pork cuts, down four percent to 987,000 MT, for prepared/processed products, up by eight percent to 241,000 MT.

Increased Supply of Low-Priced Domestic Cuts May Limit Demand for Chilled Pork in 2012

Due to its affordable price and high quality, American chilled cuts have become the preferred choice for Japan’s national and regional retail chains, as well as some specialty food service companies. In the first half of 2012, Japan’s imports of U.S. chilled pork were up one percent over the same period last year, reflecting stable retail and food service demand. Canadian chilled cuts sustained nine percent growth as well (see Table 8-B). To counter the popularity of imports, a seasonal hike in the monthly slaughter of domestic hogs, which usually occurs during the second half of the year (typically starting in the summer), is expected to keep the price of domestic fresh/chilled pork cuts lower than average and may slow sales of imported chilled cuts in Japan.

Japanese Customs Inspection May Hinder Raw Material Frozen Pork Imports in 2012

Average household purchase data for the first half of 2012 indicate modest growth in Japan’s retail sales of processed pork products (ham, sausage and bacon), suggesting solid demand for cheap frozen imports (see Table 1). At this time, Japan’s Customs investigation on import duty evasion and the resulting increase in inspections of pork shipments, which started this springtime, have caused some uncertainty in this year’s outlook for frozen imports. Customs clearances of frozen pork shipments at various ports were reportedly slow in May and June (see note at the bottom of this section).

In the first half of 2012, Japan’s imports of frozen pork from all sources fell six percent compared to the same period last year, with the United States (down one percent), Canada (down nice percent) and Denmark (down 12 percent) (see Table 8-C). The above challenges to cheap cuts seem to have been offset by increased imports of prepared/processed pork products, which were up 11 percent in the first half of 2012. This could suggest a shift to seasoned ground pork products (for sausage manufacturing) mainly supplied by the United States (up 10 percent) and Canada (up six percent). Due to ample stocks, there have been no concerns about supply shortages of frozen raw pork at this time.

June’s ending frozen stock, which was estimated at 219,436 MT, was still slightly higher compared to this year’s beginning level (see Table 6-B). An overall slowdown in consumption forecast for this year should also leave sizable stocks, which are projected nearly unchanged from the year’s beginning level at 217,000 MT (roughly equal to three or four months’ worth of Japan’s annual processing demand for pork).

Post’s newly revised 2012 import projections by country are: for pork cuts (chilled and frozen combined), down one percent for the United States at 416,000 MT, down eight percent for Denmark at 150,000 MT, and down eight percent for Canada at 208,000 MT, with each country’s respective shares at 42 percent, 15 percent, and 21 percent.

Note: Readers may note that, unlike beef which is under a simple ad-valorem duty system (38.5 percent levied on the C&F import value), Japan’s pork import regime has been operating under a complex differential duty system, known as the “Gate Price System.” Detailed information on the Gate Price System can be found in the USDA Economic Research Service Publication, “Pork Policies in Japan, March 2003.” The gate price is a minimum import price system currently set at JP 525 yen per kilogram of pork cuts.

Under this system, Japanese meat importers are required to pay a calculated difference when their declared import value for a shipment is below the gate price level. In addition, importers are also required to pay a 4.3 percent duty levied on the gate price level. When its declared value is equal to or above the gate price level, importers are required to pay only the 4.3 percent duty portion. Therefore, the lower the actual import value is, the differential duty to be paid to Customs becomes larger.

This generally makes it very difficult to import cheap frozen cuts. Japan’s customs authority requires importers to comply with the differential duty system and occasionally has called for stricter compliance with the system in the wake of repeated duty evasion cases. These cases include instances of falsified import value declarations (declaring the import value equal to the gate price level) to avoid paying any differential duty on imports of inexpensive frozen cuts. Earlier this year, the Tokyo prosecutor’s office uncovered a scandal involving a well-known broker in Japan’s pork business community. The company and its associates (numerous small brokers, including paper companies) had allegedly evaded JP 13 billion Yen worth of differential duty. This case prompted the Customs authority to enhance its inspection and monitoring. [Note: Frozen raw material pork accounts for over 65 percent of Japan’s total imports for pork cuts.]

October 2012

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