China presents massive opportunities for pork, poultry exporters
With strong economic growth expected to continue, China will remain the world’s largest market for animal protein.
Pork is still the leading meat protein consumed globally, although chicken is catching up. China, which produces and consumes just over half of all the world's pork, plays a big role in making pork the No. 1 animal protein.
In fact, China's role is only going to grow, according to James Kenwood, managing director and coverage banker, Rabobank International. Kenwood told the audience at the VIV International Pork Production Summit - held in conjunction with International Production and Processing Expo 2014 in Atlanta - that U.S. and E.U. pork consumption are relatively stable, but that China is growing.
China is already the world's largest animal protein-consuming market, and it is No. 1 in egg consumption and production in addition to its top place in pork. Kenwood said that what happened to meat consumption in Japan as that nation's economy grew from the 1960s through the 1980s and more Japanese moved into the middle class provides an example of what is likely to happen in China.
Kenwood said that as demand for meat in Japan grew, the amount of arable land that could be used to grow grains to feed animals didn't increase. Lack of ability to grow more grains gave meat producers in grain surplus countries a competitive advantage in the Japanese market. In 1970, nearly all of Japan's pork was produced domestically, but today around half of Japan's pork is imported.
Growth of US exports
Kenwood said that the U.S. used to be a net importer of pork as recently as the early 1990s and now net exports account for nearly one-fifth of U.S. pork production. In 2013, the largest export markets for U.S. pork were Japan, Mexico, China and Hong Kong, and Canada. He said that, based on Rabobank estimates, the U.S. in 2013 had the lowest live production cost in the world at just over $0.60 per pound, with Mexico and Canada close behind at $0.63 per pound. He said that in 2013, countries with live cost of around $0.80 or less were net exporters and those with costs greater were net importers of pork. Kenwood said the U.S. cost advantage isn't just grain price advantage; U.S. pork producers are doing a very good job with their pigs.
U.S. pork producers could experience record profitability in 2014 with profits well over $30 per head projected by Rabobank. Kenwood said that porcine epidemic diarrhea (PED) virus is a "wild card" that could have a big impact on profitability. The disease increases operating costs for producers, but also will reduce supply of hogs for slaughter as the year progresses, and this may support higher pork prices. Kenwood said that U.S. pork production won't expand for at least 12 to 18 months, because of concerns over future corn prices and PED virus.
Pork production in China
Pork output in China grew by around 36 percent from 2000 to 2013. China's pork production for 2014 is forecast by the USDA to be at 54.7 million tons, and this represents just over one-half of the world's pork. The USDA estimates that the U.S. will produce 10.85 million tons of pork in 2014 with net exports representing around 18.4 percent of this total. Net pork imports into China increased 862 percent from 106,000 metric tons in 2000 to 1.02 million metric tons in 2013. Even with this rapid growth, imports still represent less than 1 percent of China's pork consumption.
Ma Chuang, vice-secretary general, Chinese Association of Animal Science and Veterinary Medicine, and partner, Boyar Communication Co., said that on January 1, a large-scale farm waste disposal act took effect in China. He said that disease issues and this waste disposal act will combine to make the industry relocate farms. China has been a major importer of soybeans for years and has recently become a net importer of corn. Increased costs associated with importing grains and higher expectations for environmental control may create opportunities for imported animal protein in China.
Poultry gains market share
Chuang said the swine industry will continue to be the foundation of meat production and consumption in China, but that the poultry industry has great potential to grow. He said poultry production and consumption will grow faster than any other type of meat. Boyar estimates that market share for poultry meat in China will grow from around 25 percent in 2010 to 33 percent in 2020 (Figure 1). He said that, because of grazing restrictions, high grain prices and dietary preferences, consumption of beef and mutton will be confined to high-income people and Muslims in China. Pork and poultry meat combined will have more than 90 percent market share for meat in China in 2020.
The one negative on the horizon for poultry consumption in China is avian influenza. Chuang said the appearance of H7N9 avian influenza in China "froze" the poultry industry. In 2013, he said that pork consumption was increased by the flight of some consumers away from chicken.
Hot and fresh
For pork, hot and fresh meat dominates the Chinese market. Sixty eight percent of meat is sold hot and fresh, 17 percent is sold chilled, and 15 percent is further processed. Because of the demand for hot and fresh meat, Chuang said that the processing facilities are located near cities where the consumers are. He said farms will have to move away from the cities because of environmental regulations.
Chuang said that as the swine and poultry industries become more integrated and the farms and plants get larger, technical service for the farms and management will become more important. Farms will upgrade as they get larger, with better housing and equipment. He said that, today, one-third of pigs in China are not fed rations from a modern feed mill. By 2020, he estimated that 90 percent of pig feed will come from feed mills.
Chuang said the growth of meat consumption in China will be slowed when economic growth falters, when there is a food safety scandal, and because hot and fresh meat dominates the market. He said he hopes the Shuanghui acquisition of Smithfield brings more than just U.S. pork to China. He said he thought the operational expertise and the product branding experience may be more important. He said increased branding of meat in China could help with the important task of building trust with consumers for refrigerated and processed meats.
Kenwood said he thinks the Shuanghui purchase of Smithfield could be very good for the U.S. pork industry. He said that this relationship can help bring U.S. pork to China because of its low cost, quality and food safety.