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Peoples Republic of China Livestock and Products Semi Annual - March 2008

by 5m Editor
14 March 2008, at 12:00am

By Jianping Zhang & Eric Trachtenberg, the USDA Foreign Agricultural Service GAIN Report. It is uncertain when China will lift its BSE-related ban on U.S. beef and beef products. Although bilateral negotiations continue, no agreement has been reached.

Executive Summary

China’s livestock production was adversely affected by snowstorms, the worst in 50 years, during the latter half of January and first half of February 2008. See next section for more details. At the same time, both pork and beef were affected by high prices for both inputs and for meat products. High commodity prices from grains and oilseeds and continuing short meat supplies will likely continue through 2008.

FAS Beijing forecasts China’s 2008 beef production to increase by three percent to 7.7 MMT. Beef imports are expected to increase nearly four-fold to 30,000 MT because of low domestic production combined with strong demand. Interest in beef could be especially high during the Olympic Games to be held in Beijing in August 2008. Some beef may be supplied by South America since China has lifted its ban on four Brazilian states. Chinese beef exports are forecast to fall by four percent to 78,000 MT because of tight domestic supplies, high domestic beef prices, and appreciating Chinese currency, the Renminbi (RMB).

FAS Beijing forecasts China’s 2008 pork production to grow by one percent to 42 MMT (CWE), thus partially reversing a nine percent decline in 2007 caused by blue ear disease. Since the 2007 fall came right after a sharp 2006 fall, 2008 production will likely be 16 percent less in 2005. As a result, the slow recovery in production in the face of strong domestic demand is expected to keep pork prices high. The short supplies are also expected to drive 2008 pork imports up by eight percent to 200,000 MT while pushing pork exports down by six percent to 330,000 MT (CWE) because of low production, higher domestic prices and the appreciating Renminbi, which has risen 13 percent against the U.S. dollar since July 2005.

Note: No data included in this report is official. All official USDA data is available at http://www.fas.usda.gov/psdonlineonline).

Swine and Pork

Production Recovering Slowly

FAS Beijing forecasts China’s 2008 pork production to recover by only one percent to 42 MMT. Despite this anticipated improvement, 2008 production will likely be 16 percent less in 2005 because of major declines in 2007 and 2006 of around nine percent a year. The 2008 recovery is slower than Post’s previous forecast in the last livestock annual report (CH7076) because of heavy snowstorms at the end of January and beginning of February 2008. By mid-February, the snow storms killed 4.09 million head of pigs and impacted 1,200 swine breeding farms at various levels. In several regions, swine production suffered because pig pens were destroyed by snow. Despite this setback, Post forecasts that damaged pig farms will resume full operation in the latter half of 2008. This slow recovery and low production will drive continued large pork imports in 2008, providing a very good market opportunity for U.S. exporters.

China’s pork production has been frustrated recently by deadly swine blue ear disease outbreaks during the latter half of 2006 and the first half of 2007. Post’s estimate for China’s 2007 beginning-year sow stocks and piglet crop production for 2007, which declined five and seven percent to 46.5 million head and 630 million head respectively, remains the same as in the previous livestock annual report (CH7076). Unit carcass weight in 2007 was lighter because swine farmers were scared by the blue ear disease into selling quickly. Many farmers hurried animals to slaughter to avoid unexpected losses.

Recently, MOA announced that China’s pork production in 2007 was 51.2 MMT, a 1.5 percent decrease from 2006. However, given the sharp price increases in 2007, post believes it is very likely that mere 1.5 percent fall in production could result in nearly doubling Chinese pork prices. In addition, the 2007 decrease must have been substantial to drive other meat prices higher because of substitution out of newly expensive pork. One possible explanation for the difference between industry and government numbers it that blue ear disease hit most backyard or small swine operations the hardest because of their poor disease control. The data sometimes do not capture these informal herds, many of which are consumed onfarm or sold to small private slaughterhouses for cash. Although commercial operations are rapidly increasing in number, in 2007 and early 2008 production increases were more than offset by the falling number of operations.

According to the swine and meat processing industries, 50-60 percent of backyard operations have left swine production. (Note: Small and backyard operations are defined as farms with less than 50 swine.) At the same time, the number of commercial farms has increased 20 percent. Both of these trends have accelerated sharply in the last couple of years. This dramatic fall has been accompanied by entry of some large feed companies, pork processing plants, and grain players into swine production. They are partly attracted by high pork prices and government subsidy policies to support pork production. The decline of small operations and the establishment of a swine futures market in 2007 in Dalian have also drawn interest to the sector. Over time, this will translate into more efficient swine and pork production and more stable pork prices in the future. As large commercial swine and pork processing companies gradually fill the gap left over by the withdrawal of backyard and small operations with more standardized production, pork supply and price volatility should fall in the future.

According to China Grain and Oil Information Center, China’s corn planted area and production in the 2007/08 grain year are estimated at 28 million hectares and 148 MMT, a four percent and a 1.7-percent increase respectively. Barring problems with the harvest, this might help Chinese swine farmers by loosening supplies. However, relief may not be forthcoming. In the last couple of years, natural disasters such as extreme draughts or floods have become more common in China. The China Meteorology Administration reported recently that China’s weather in 2008 is expected to be very dry. As of February 25, 2008, 11 million hectares of arable land suffered droughts, with 1.9 million head of livestock facing a lack of water. If weather prognosis continues to be poor, local corn prices may stay high. It may also put pressure on livestock producers.

Outside the feed issue, there are other increasing constraints in swine and pork production. For example, the migration of more than 130 million Chinese to the cities has caused a falling labor supply in the countryside. Industrialization and urbanization have attracted million to the cities, especially in coastal areas. According to the Green Book on Population and Labor published by the China Academy of Social Sciences in 2007, three-fourths of Chinese villages have no extra young to emigrate to cities. Even for those who stay on the farm, paid work in the village is more attractive than hog farming. In one survey, off-farm work accounted for 70 percent of income as wages increased by ten percent a year. The labor shortage could become a constraint to the development of the swine sector. On January 18, 2008, the National Statistics Bureau announced that China’s PPI in January was up 7.1 percent compared with January 2007, the largest monthly rise in three years. Price increases for water, electricity, transportation, energy, and labor combined with general inflation and the risk that blue ear disease and other problems are not completely under control, will likely continue constraining pork production over the next couple of years.

Despite the problems, hog production continues to evolve. Most recently, the ongoing modernization of the sector have recently resulted in two 10-million-hog development projects. One is a joint-venture between U.S. Whiteshire Hamroc Company and China Tangrenshen Group in Hunan Province. The two sides have signed two contracts in January and February 2008 to import 2,000 U.S. breeding pigs. The other project is sponsored by COFCO, China’s top state-owned grain import and export player, in Hubei Province. However, the projects will take about two to three years to complete. Increasing commercial farms will push up demand for feed corn production but in China additional arable land is limited. To run these facilities, China must either expand feed corn plantings (which will be very difficult) or increase feed grain imports. As hog production modernizes, there will be increasing demand for other imported feed ingredients.

Another factor is that China is strengthening its meat quality control program. Some supermarkets in large cities have requested trace-back information of animal production and processing. With the public increasingly aware of food safety issues, Chinese consumers are increasingly unwilling to trust backyard operations.

Subsidies Favor Large Operations

Post believes that backyard operations will continue shrinking not only because the blue ear disease and other problems but also because of current government subsidy policies. During 1 July 2006 – 30 June 2007, the government provided RMB 50 ($7) cash for swine farmers for each producing sow benefitting approximately 46.89 million head. The project expanded to RMB100 ($14.1) during 1 July 2007 – 30 June 2009. The government also provided subsidies for producing sow insurance with each head cost at RMB60 ($8.5) with the government paying 80 percent of the cost. This project has benefited 24.59 million producing sows. In 2007, the government invested RMB 2.5 billion ($352million) to support standardized animal production. The same amount will be spent in 2008. To ease farme rs’ cash flow, the bank loan pay back period was extended from one to three years for swine farmers if they have difficulties. Backyard and small-sized operations are eligible to receive benefits.

Pork Prices Likely Stay High

China’s pork prices, which have been cited as a major contributor to China’s recent inflation in the second half of 2007, soared 69 percent in February 2008. Since China’s domestic pork production is not expected to recover until mid to late 2008, the pork shortfall coupled with strong demand will likely to keep prices high until mid 2008. To reduce inflation, the government has imposed a cap on a series of food prices, including pork. Processing companies are required to report and get approval before any new price hikes. At the same time, the government subsidizes low-income consumers RMB20-30 ($2.7-4.3) per person per month for six months. To ease the supply gap, China has quickened pork imports into strategic reserves. The high pork prices are expected to become stable or even decrease slightly when swine and pork production improves in the second half 2008.

Recovering Consumption

Post forecasts China’s 2008 pork consumption to grow by one percent to 41.9 MMT, still below 2006 levels because of low pork production. Pork is still the most preferred meat in China because it can be prepared easily at home and it fits into the local diet well. After blue ear disease outbreaks fell considerably in the latter half of 2007, consumers’ confidence in pork consumption recovered quickly. The negative news of three cases of human infection with the highly pathogenic avian influenza in China in February 2008 (two already died) may push consumers shift back to pork more quickly this year.

Increasing Imports, U.S. Plants Relisted

Post forecasts China’s pork imports in 2008 at 200,000 MT, an eight percent increase from the previous year’s two-fold increase. The United States will continue to be China’s largest pork supplier. China’s total pork imports in 2007 were 186,000 (CWE) with U.S. share accounting for 47 percent. U.S. market share in 2008 is expected at the same percentage. Another major reason for large imports from the United States is that China has made its currency regime more flexible by letting the Yuan appreciate steadily. This growth has been pushed by the Chinese supply-demand situation, despite a series of restrictive sanitary measures.

One of the most challenging has been China’s zero tolerance of ractopamine in pork, despite strong scientific evidence that the compound is safe. Most recently, ractopamine advanced to Step Eight in the Codex Alimentarius Commission approval process, the last step before final approval. Despite this, detections of ractopamine have resulted in U.S. pork plants being denied permission to send product to China (“delisting”). AQSIQ sent a technical group to the United States to check U.S. pork plants in October 2007. After they returned, six out seven delisted pork plants were relisted.

MOA and AQSIQ jointly announced on January 15, 2008 (Memo 963) to lift the import restrictions for German pork, which was placed several years ago in response to outbreaks of Classical Swine Fever (CSF) in commercial farms in Germany. The veterinary authorities of the two countries will work on an inspection and quarantine protocol, and also identify a list of approved plants for exports. First shipments are expected to start towards the end of 2008. Post believes that German exports would not threaten U.S. pork exports, because China is not Germany’s traditional export market. German pork exports to China in 2002, the highest level in recent years, was 5,449 MT accounting for only two percent of China’s total imports.

U.S. exports will likely go to China’s strategic reserves for at least the next 2-3 years, while German exports are expected to go to the retail sector. Additionally, German pork prices may not be competitive as the U.S. pork prices.

Falling Exports

FAS Beijing forecasts China’s live swine and pork exports in 2008 to decrease by four and six percent to 1.55 million head and 330,000 MT (CWE) respectively. This is a reversal from Post’s previous forecast in the last livestock annual report (CH7076) and is a result of production constraints caused by snow storms, slow production recovery, and strong local demand.

For live swine exports, Hong Kong and Macau are the two dominant export markets accounting for 99.9 percent in 2007. This pattern will not change in 2008. China’s live swine exports to Hong Kong and Macau, like cattle, are allocated by MOFCOM export quota and announced by the end of each year. MOFCOM announced on December 15, 2007 that China’s 2008 large swine export quota to Hong Kong at 1.32 million head and to Macau at 150,000 head respectively, and the export quota for medium swine to Hong Kong at 67,814 head and to Macau at 2,400 head respectively. If the export companies that have the allocated quota cannot fill the quotas, MOCOM will re-allocate the quotas in the latter half of the year. Post’s forecast number for China’s 2008 live swine exports is very close to MOFCOM announced export quotas.

Pork exports are expected to further decrease by six percent from the previous year’s 36 percent decline. The blue ear disease and unexpected fast appreciation of the RMB against the U.S. Dollar will continue to constrain China’s exports.

Further Reading

More information - You can view the full report by clicking here.

List of Articles in this series

To view our complete list of 2008 Livestock and Products Semi Annual Reports, please click here

March 2008