Dermot Hayes, Iowa State University, 2010 Pork Management Conference, June 16-18 in Hilton Head, S.C.

1. U.S. Global Position
Dermot Hayes
Iowa State University
Wednesday, June 16, 2010
10:30 am - 11:15 am

2. Overview
 Trade patterns
 Competitiveness of the US industry
 China

3. -1000
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1960
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ThousandMetricTons(CWE)
US Pork Exports and Net Exports 1960:2009
Net Exports
Exports

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Percent
US Pork Exports and Net Exports as a Percent
of Production
Net Exports as a Percent of
Production
Exports as a Percent of
Production

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Pork Exports 1960:2010
Brazil
Canada
EU-27
United States

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

8. 0
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0.6
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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
Tons of Carcass per Sow perYear
US and Canada European Union Brazil China

9. 600
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ThousandHead
Beginning of Year Sow Numbers in Canada

11. 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

12. Miles of new construction outside
every city

15. 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 has begun to import corn

16. China-US Comparison

21. How do you mechanize this?

25. 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

29. Chicken heads are a delicacy

30. 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

31. 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

32. A common sight outside restaurants

33. Disease is endemic, this leads to
overuse of antibiotics and residues

36. 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%

37. 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

40. 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

41. 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

42. 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

43. 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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44. 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

45. Figure 4. Net Chinese Pork Imports as a Percent of
Chinese Pork Consumption
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