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USDA GAIN: Livestock and Products


13 March 2012

USDA GAIN: Korea Livestock & Products Semi-annualUSDA 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. The swine industry is steadily recovering from the aftermath of FMD with pork production estimated at 982,000 MT, up 17 percent year-on-year. The increase in production is forecast to push imports down to 500,000 MT, a year-on-year decrease of nearly 100,000 MT. Imports of U.S. pork, though down from last year, are forecast to remain strong at 170,000 MT.

USDA GAIN: Livestock and Products

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).

Commodities: Animal Numbers, Swine

Production:

The swine industry is steadily recovering from the FMD outbreaks in late 2010 and early 2011 where over 3.4 million hogs were culled, or one-third of the total inventories. In an effort to help the swine industry rebuild, the government created a zero duty tariff rate quota (TRQ) for 31,000 head of breeding stock in 2011 and another 5,000 head during the first half of 2012.

Meanwhile farmers are working quickly to rebuild their herds and will continue to do so throughout the year. As can be seen from the KREI survey results below, swine growers are planning to expand current herd sizes 12 percent by this coming August. In order to make this happen, farmers are increasing sow inventories, which currently stand at about 93 percent from where they were prior to FMD.

High carcass prices are also helping drive the recovery. In December 2011, the average carcass price was 6,336 per kilogram ($5.60), up 46 percent from a year earlier. Prices have, however, softened in January 2012 at 4,725 won ($4.20) per kilogram. Furthermore, according to KREI, the average carcass price is projected to come down to 4,669 won/kg ($4.10) in 2012 from 5,808 won/kg ($5.20) in 2011.

While farmers are rebuilding, the expansion in production is occurring at a slower pace than was originally expected in large part because of the short supply of sows some of which because of overuse are declining in productivity. The pig production estimate in 2012 is accordingly reduced from 14.6 million to 13.9 million head. Although down from the earlier estimate, 2012 hog production is forecast to increase 5 percent year-on-year.

Over the longer-term, it is unlikely that the total hog inventories will reach pre-FMD levels of 9.8 million for the reasons listed below, many of which are policy related changes that were introduced to reduce the likelihood of future FMD and other infectious disease outbreaks.

  • There is a short supply of sows in 2012 that will keep production in check.
  • Swine farms can no longer be located within 500 meters of a residential area.
  • Farmers are required to provide minimum barn space requirements; 1.4 square meters for a sow and 0.8 square meters for porkers.
  • The prohibition on livestock manure disposal in the open sea became effective on January 1, 2012. As of November 2011, there were 360 swine farms that were dumping an estimated 60,000 MT of manure into the ocean each year.
  • Large sized farms (e.g. 50 head of cattle or 1,000 head of swine) must cover 50 percent of the cost for FMD vaccination. The government will continue to subsidize the cost for smaller sized farms.
  • Penalties have been imposed on farmers with animals that have less than 60 percent of the FMD antibody. A recent survey shows only half of the farms met this requirement.
  • In October, 2012, Korea plans to introduce a pilot traceability program at a number of swine farms. The hogs will receive a group tracking number when they leave the farm. The government will furnish the farms participating in the trial program with the necessary technology. The traceability system will likely be expanded to all swine farms sometime in the future.
  • At the end of 2012, all breeding farms, semen collection facilities and large livestock farms (9,000 farms) will be required to obtain a business permit. Also, small sized farms, regardless of size, will have to be registered and receive mandatory training.

Slaughter:

The 2012 slaughter estimate has been trimmed down about 3 percent to 12.9 million to reflect the decrease in production. Though down from the earlier estimate, hog slaughter is forecast to increase 20 percent year-on-year.

In 2011, the number of animals marketed dropped to 10.8 million because of FMD-related culling and livestock movement controls that remained in place until mid-year. Monthly slaughter in 2011 remained below 1.0 million head for most of the year compared to 2010 when monthly figures ranged from 1.1 to 1.4 million head.

Stocks:

Post has revised 2011 hog ending inventories to reflect the Korean government’s updated data series, which was based on FMD vaccination records required for all swine. Post was previously backing out 864,000 head from the government numbers since they had had unexpectedly and without explanation increased ending inventories by this amount back in 1998.

Ending inventories in 2012 are forecast at 8.6 million head, up about 460,000 from the beginning of the year to account for the anticipated increase in production.

Commodities: Meat, Swine

Consumption:

Pork consumption in 2012 is expected to stay relatively unchanged from the earlier estimate at 1.5 million MT, which is about 3 percent higher than the previous year.

In 2011, pork consumption fell 5 percent to 1.45 million MT because of the shortage in domestic pork resulting from FMD and the corresponding changes consumer dietary patterns. In particular, consumers switched to other meat proteins such as poultry, fish, domestic beef and imported red meats. According to January 2012 from KREI, the top five substitutes for domestic pork in rank order were: chicken, fish and Hanwoo beef, duck, imported beef and imported pork.

Although more recent survey results are unavailable, the following KREI survey shows that 59 percent of pork consumption occurred at restaurants where about half the pork served is imported. Since eating out is one of the first things to go when economic times get tough, consumption of imported pork to a large extent depends on the wellbeing of the Korean economy. About 20 percent of imported pork goes for retail and 30 percent for processing.

Trade:

In an attempt to curb rising pork prices, the Korean government announced a zero duty tariff-rate-quota (TRQ) for 70,000 MT of chilled/frozen pork bellies and cuts for processing during the first quarter of 2012. The government had likewise implemented TRQs last year for select pork products. Most of the quota for processing cuts was filled, but the allocation for chilled pork bellies was far from being filled due to short supplies on the international market. The following table provides a summary of the 2011- 12 TRQ announcements.

The 2012 pork import estimate remains unchanged at 500,000 MT, but still down nearly 100,000 MT from the previous year given the recovery in the local swine industry. Although down year-over-year, imports are still forecast to remain above pre-FMD levels of 382,000 MT in 2010.

Meanwhile, the United States is expected to remain the single largest supplier of pork to the Korean market. Imports of U.S. pork in 2012 are forecast at 170,000 MT, down 11 percent from the previous year, but still higher than pre-FMD levels of 105,000 MT. The U.S. import estimate has also been adjusted to reflect the expected gains under the KORUS FTA, though some have been watered down because of the emergency TRQs. The tariff on pork, which ranges from 22.5 to 30 percent depending on the cut, will drop anywhere from 2 to 10 percent upon implementation.

The implementation of the FTA with the European Union on July 1, 2011 and scheduled implementation of the KORUS FTA on March 15, 2012 are not expected to have a major impact right away since domestic pork is still in somewhat short supply because the local industry is still rebuilding. However, the effects of the agreements will likely start showing through in the next 2-3 years.

During the second half of 2011, pork imports slowed as domestic production started speeding up. Imports reached a record 609,000 MT, of which slightly more than 30 percent were from the United States. On a product weight basis, imports of U.S. pork totaled 152,000 MT and were worth $473 million in 2011.

March 2012

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