U.S. Global Position (Imports/Exports) Dermot Hayes Iowa State University

U.S. Global Position (Imports/Exports) Dermot Hayes Iowa State University

Overview Recent trade patterns Competitiveness of the US industry China

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Thousand Metric Tons (CWE) 2500 US Pork Exports and Net Exports 1960:2009 2000 1500 1000 Net Exports Exports 500 0-500 -1000

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Percent 20 US Pork Exports and Net Exports as a Percent of Production 15 10 Net Exports as a Percent of Production Exports as a Percent of Production 5 0-5 -10

Thousand Metric Tons (CWE) 2500 2000 1500 Pork Exports 1960:2010 Brazil Canada EU-27 United States 1000 500 0

Percent 60 Pork Imports as a Percent of Domestic Production 50 40 30 20 Australia Canada Japan Korea, South Mexico Russia 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1.8 Tons of Carcass per Sow per Year 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 US and Canada European Union Brazil China

Thousand Head 1,800 Beginning of Year Sow Numbers in Canada 1,600 1,400 1,200 1,000 800 600

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

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

Percent What other countries have done within a 10-20 year period Figure 8. Net Imports as a Percent of Total Consumption 60 50 40 Australia Japan S Korea Mexico 30 20 10 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009-10 -20 Year

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

Percent 1 0.5 0-0.5-1 -1.5-2 -2.5 1975 1976 Figure 4. Net Chinese Pork Imports as a Percent of Chinese Pork Consumption 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008