U.S. Global Position (Imports/Exports)

Dermot Hayes

Iowa State University

Overview

Recent trade patterns

Competitiveness of the US industry

China

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Pork Exports 1960:2010

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Pork Imports as a Percent of Domestic Production

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Beginning of Year Sow Numbers in Canada

Rate and scale of development

Markets forces, entrepreneurship and centralized

government have combined to generate faster growth than

Japan or South Korea at the same stage of development

The scale is at least ten times greater than any other land

scarce country

Vast movement of labor out of agriculture, the loss of

workers will be noticed as the impact of the one child policy

becomes more obvious

Unproductive land being planted to trees

High quality land moving into development

Miles of new construction outside

every city

Agricultural Resources China has gone below the politically sensitive 120 million hectares

(296 million acres), has at most 275 million acres, a lot of which is

poor quality land that cannot be mechanized and should not be

farmed

The US has about 360 million acres in crops and about 400 million

acres of pasture, total agricultural area of almost a billion acres

Yet China feeds almost five times the population, the key to this

success is the creative Chinese diet, and the use of labor to

substitute for crop land and animal feed

China has given up on the most land intensive products (beef and

soybeans) and is close to importing corn

China-US Comparison

How do you mechanize this?

Economic fundamentals

Once a country starts to import animal feeds, its internal

prices rise to reflect world prices plus transportation costs

It costs as much to move grain from the US to Japan as it

costs to produce this grain in the US

It is far more efficient to imports boneless boxed cuts than

the bulky grain needed to produce hogs

This advantage is emphasized by taste differences, China and

US consumers are like are Jack Sprat and his wife

Chicken heads are a delicacy

Table 1. Chinese pig production and slaughter, by farm size.

Slaughtered No. of Farms (%) Share Total

Slaughtered(1,000) (%) Share

1~9 101,963,901 94.483 347,731 52.867

10~49 4,815,474 4.462 120,945 18.388

50~99 851,429 0.789 58,999 8.970

100~499 249,016 0.231 59,639 9,067

500~2999 33,844 0.031 36,477 5.546

3000~9999 3,388 0.003139 17,420 2.648

10000~49999 911 0.000844 14,181 2.156

Above 50000 30 0.000028 2,358 0.359

107,917,993 100 657,750 100

Backyard units

At least half of the pork in China comes from smaller units these farms turn labor into feed

With 9% to 11% economic growth, China has better things to do with labor than raise pigs on household waste

This system requires labor, small slaughterhouses, wet markets and a willingness to buy non standardized product

Backyard pig production disappears quickly once households can afford a car to drive to the grocery store and to find employment

Current mortality in Chinese pork production is reported to be very high due to disease

http://www.agrarhaszon.hu/galeria/image/products/1039_pigs_china.jpg

A common sight outside restaurants

Disease is endemic, this leads to

overuse of antibiotics and residues

Competitive position of the pork

industry as of early April, 2010

Corn prices are at $7.00 to $7.40 per bushel, this market is protected and prices are set

Soybean meal is already at import parity

Current production costs; US $48/100lbs, China $75 to $80 a minimum cost difference of 56%

Feed only in China is $52 to $56,

It costs $0.20 per pound to ship pork from US plants to China, this increases the carcass price by 25% to 30%, if this was the only barrier US pork would flood in

Add in the discriminatory vat and import duty and the difference becomes 58%

Competitiveness At current production costs pork carcasses will not move,

however there is a quality difference and the differential taste

issue

All the animal extremes (ear, tongue, snout, mask, feet and hock

white organs and bung should move if only economics were at

play

Chinese consumers do not place as much value on the loin and

therefore they have a relative preference for the shoulder

Skin on shoulder has an additional 13% competitive advantage

and is price competitive

However the Ractopamine issue keeps cuts and processed

products out of legal channels

The recent Chinese intervention

program

The intervention program has not kicked in and there is a rapid reduction in backyard units

The announcement of the program worked to attract commercial investment but these units are suffering too

The commercial units are in await and see mode but they seem confident

What happens next? In the short run, opportunities will be based on the grey market,

this adds about 250 RMB per ton for repack and 3,250 RMB for

the “agent fee” this is $0.24 per pound

Pork exporters and canners will buy legal US product to avoid

residue issues, possibly 20,000 to 50,000 tons

There will be a scarcity in 12 to 18 months, more and more of

the carcass will move to China, probably shoulders and some hams

When the US and Chinese hog cycles are at opposite points, then

we will see more six piece carcasses some in through official

channels

What happens next?

A currency appreciation or a solution to the

Ractopamine issue, or a removal of the differential vat or

import duty would generate large movements of

shoulders and inexpensive processed meats

When the currency strengthens soybean meal prices in

China will fall, but corn prices will not. Total production

costs will go up by 8% for each 10% in appreciation

What other countries have done within a 10-20 year period

Figure 8. Net Imports as a Percent of Total Consumption

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Long run

China will face food price inflation and high food prices

unless it imports

It is in Chinas best interests to open its food market for

competition, the government will understand this eventually

Imported quantities will be enormous, take your best

market and multiply by 10

Figure 4. Net Chinese Pork Imports as a Percent of

Chinese Pork Consumption

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