Export Projections and Associated RisksDermot Hayes

Iowa State University

Overview• Big Picture• Transportation cost economics• Taste differences

• Competitive position and the importance of exchange rates• Country by country analysis • China• Japan• S. Korea• Mexico• Columbia • Philippines• Australia/New Zealand

• Importance of disease in Asia • Risks associated with export expansion

Transportation costs• It is far more expensive to ship corn and soybeans than the

meat equivalent

• Instead of shipping feed all the way to an interior livestock producer, we can ship the meat directly into the ports where the consumers live

• Large scale grain movements can usually be traced back to market interventions; in particular many countries allow feed to enter without restriction, but restrict meat imports

Proportion of total US meat exported

Chicken heads are a delicacy

Free Trade Agreements

• Recent agreements with S. Korea and Columbia have added 100 million customers for US value added products

• These agreements seem to be contagious

• Japan is now very interested in TPP

Competition with the EU• Despite a dramatic weakening of the Euro, the US still has

20% cost advantage

• This could be eliminated if the Euro continues to fall

• Remember, Europe has a surplus of feed grains and excellent producers and pork marketers

• In the near term, Europe will dominate the belly market and share the VM and low cost muscle meat markets

How (Asia) is Changing US Agriculture

• Asia needs to import “acres” of land intensive productsEconomic growth and diet

Move away from backyard livestock production towards commercial feed

Expansion of cities and the need to add infrastructure

Loss of labor willing to grow land intensive crops on mountainsides

• Will they buy meat or feed grains?

• Taste differences Asia will probably import feed grains if it can control disease, and import pork if it cannot

China-US Comparison

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 cotton, sugar and soybeans) and is importing some corn

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

Other crops• China has imported 3.5 million tons of corn so far this year,

this is approximately one million acres

• In addition, it now imports 20% of its sugar needs

• In the fall of 2011 China has been importing the meat from more than one million pigs each month

• On an annual basis this is equivalent to 5.5 million tons of corn

Intervention Costs for China• In 2011, 1.46% of the total 6.5% increase in the CPI was due to

pork prices, this means that more than 20% of the overall inflation problem is directly attributed to pork. Hence the phrase the China Pig Index (CPI)

• Food price inflation may cause political instability

• Adding more pigs will probably cause the disease problem to get worse, more disease means higher production costs

• Building a modern pig industry in China is a huge waste of grain, energy and people

• China will eventually have to violate its WTO commitments, if it has not done so already

Why it matters• If China imports corn and soybeans it drives up feed costs in

the US

• If China continues to buy “parts” it actually reduces the cost of producing US loins and other muscle cuts

• If China imports shoulders the US pork industry will need to expand

• The US Midwest can make better use of the manure than anywhere else in the world

China is driving US prices for some cuts

Japan Import Statistics Commodity: 0203, Meat Of Swine (Pork), Fresh,

Chilled Or Frozen Year To Date: January - November

Partner Country Unit Quantity % Change

2011/2010 2009 2010 2011

World T 641,537 693,061 725,537 4.69

United States T 265,593 273,887 297,425 8.59

Canada T 155,823 163,987 157,114 - 4.19

Denmark T 111,052 123,939 121,272 - 2.15

Mexico T 40,204 37,416 37,354 - 0.16

Chile T 24,130 22,648 26,597 17.44

Spain T 7,223 13,195 22,205 68.29

Japan Import Statistics Commodity: 0203, Meat Of Swine (Pork), Fresh,

Chilled Or Frozen Year To Date: January - November

Partner Country

United States Dollars % Change

2011/2010 2009 2010 2011

World 3,577,222,776 4,124,292,830 4,769,841,681 15.65

United States

1,472,704,347 1,621,200,724 1,948,095,022 20.16

Canada 870,999,166 973,316,711 1,034,141,427 6.25

Denmark 616,726,426 738,036,827 797,203,533 8.02

Mexico 225,978,104 224,359,731 247,427,952 10.28

Chile 135,036,835 135,080,907 174,968,842 29.53

Spain 44,676,144 83,593,697 151,106,687 80.76

S. Korean Pork Market 1980:2024

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Production (1000 MT CWE)

Total Imports (1000 MT CWE)

Total Dom. Consumption (1000 MT CWE)

US Exports (1000 MT CWE)

Competitive Position with a global quota and without SPS issues• The binding US quota is a valuable asset and companies do

not need to compete on price if they know it will fill, this has eroded the US price advantage

• US companies are so protective of their quota that they incur huge costs to avoid being delisted, this has exaggerated the impact of the tetracycline restriction

• At current exchange rates the US is the worlds most competitive pork producer

• If the quota and SPS problems went away the US would capture market share from Brazil, Canada and the EU

• Total sales would rival those of Germany today, 140,000 tons and $400 million dollars

DensityDensity

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Iowa China

Sows per Acre in Iowa and China

Tons of Carcass per Sow per Year

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ChinaKorea, SouthPhilippinesTaiwanUnited StatesVietnam

Histogram of Expected Gross Margin per Hog in 2005: Expected Margin over costs: $21 per Animal

Histogram of Expected Gross Margin per Hog in 2012: Expected Margin over costs: $21 per Animal

Summary• Japan, stagnant unless we get TPP• TPP with Japan, and without Europe and Canada would be great!

• Mexico, continued growth especially when we need them, i.e. when our prices are low

• China is a wild card, but do not be surprised if exports continue• Huge new opportunity in Columbia• Philippines has enormous long term potential and short term

headaches• Australia and New Zealand, huge new potential under TPP otherwise

markets are limited by sanitary barriers• Vietnam is a place we can sell bones, blood, lungs etc.( if we are

allowed)• Russia is once again a promising market, but is headed for overall

self sufficiency if it can get disease in check