U.S. Global Position (Imports/Exports)
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
1500
1000
-500
-1000
US Pork Exports and Net Exports 1960:2009
2000
Net Exports
Exports
500
0
20
15
Percent
10
US Pork Exports and Net Exports as a Percent of Production Net Exports as a Percent of Production Exports as a Percent of Production
5
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
0
-5
-10
Pork Exports 1960:2010 2500
Brazil Thousand Metric Tons (CWE)
2000
Canada EU-27
1500
United States 1000
500
0
Pork Imports as a Percent of Domestic Production 60
50
Percent
40
Australia Canada Japan
30
Korea, South Mexico
20
Russia 10
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tons of Carcass per Sow per Year 1.8
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
Beginning of Year Sow Numbers in Canada 1,800
Thousand Head
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 At least half of the pork in China comes
http://www.agrarhaszon.hu/galeria/image/products/1039_pigs_china.jpg
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
What other countries have done within a 10-20 year period Figure 8. Net Imports as a Percent of Total Consumption 60
Australia 50
Japan S Korea
40
Mexico
20
10
-10
-20
Year
20 09
20 07
20 05
20 03
20 01
19 99
19 97
19 95
19 93
19 91
19 89
19 87
19 85
19 83
19 81
19 79
19 77
0
19 75
Percent
30
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 19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08
Figure 4. Net Chinese Pork Imports as a Percent of Chinese Pork Consumption
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Year
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
1500
1000
-500
-1000
US Pork Exports and Net Exports 1960:2009
2000
Net Exports
Exports
500
0
20
15
Percent
10
US Pork Exports and Net Exports as a Percent of Production Net Exports as a Percent of Production Exports as a Percent of Production
5
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
0
-5
-10
Pork Exports 1960:2010 2500
Brazil Thousand Metric Tons (CWE)
2000
Canada EU-27
1500
United States 1000
500
0
Pork Imports as a Percent of Domestic Production 60
50
Percent
40
Australia Canada Japan
30
Korea, South Mexico
20
Russia 10
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tons of Carcass per Sow per Year 1.8
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
Beginning of Year Sow Numbers in Canada 1,800
Thousand Head
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 At least half of the pork in China comes
http://www.agrarhaszon.hu/galeria/image/products/1039_pigs_china.jpg
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
What other countries have done within a 10-20 year period Figure 8. Net Imports as a Percent of Total Consumption 60
Australia 50
Japan S Korea
40
Mexico
20
10
-10
-20
Year
20 09
20 07
20 05
20 03
20 01
19 99
19 97
19 95
19 93
19 91
19 89
19 87
19 85
19 83
19 81
19 79
19 77
0
19 75
Percent
30
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 19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08
Figure 4. Net Chinese Pork Imports as a Percent of Chinese Pork Consumption
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Year
