1 December 2011

15 minute read

Report Highlights

FAS Beijing forecasts China’s beef production in 2012 will continue to decline to nearly 5.52 million metric tons (MMT), down one per cent from the year before. Meanwhile, pork production in 2012 will rise four per cent to 51.3 MMT following a three per cent decline in 2011. High prices and resumption in subsidies this summer are encouraging herd expansion and this will boost output beginning early 2012. Lower domestic beef production will encourage higher beef imports, with sales forecast to rise seven per cent to 45,000 MT in 2012. Pork imports are forecast to rise eight per cent to 480,000 MT fueled by continued strong Chinese pork demand. Meanwhile, China’s live hog imports will continue rising, reaching 12,000 head in 2012, up 20 per cent from estimated 10,000 sales in 2011. China’s live cattle imports in 2012, almost all breeding dairy cows, are expected to recover four per cent to 75,000 head due to rising demand from the dairy sector.

Executive Summary:

FAS Beijing (Post) forecasts China’s 2012 total meat production will rise three per cent to 81.4 million metric tons (MMT), following an estimated one per cent decline in the previous year. Beef, pork, sheep and goat, and poultry meat shares are estimated to account for nearly seven per cent, 63 per cent, six per cent, and 23 per cent respectively.

Beef production in 2012 is forecast to continue downward to 5.5 MMT as comparatively poor farm returns for raising beef cattle dampen incentive to expand herd size. Lower domestic production will raise imports seven per cent to 45,000 metric tons, carcass weight equivalent (CWE). Beef exports in 2012 are forecast to increase four per cent to 57,000 MT (CWE), fueled by higher demand in China’s traditional export markets in Asia.

Live cattle imports in 2012, almost all breeding dairy cows, are forecast at 75,000 head, a four per cent recovery from an estimated 15 per cent decline in 2011. The lower than expected imports in 2011 are due to short cow supplies from Australia, the largest supplier to China’s imports, and considerably higher international cattle prices.

Pork production in 2012 is forecast to jump four per cent to 51.3 MMT from an estimated three per cent decline in the previous year. Fueled by sharply higher prices in 2011, China’s pork producers are steadily expanding herd size and this will help boost pork output beginning early 2012. Production growth is also being supported by China’s decision in July 2011 to resume a 100 yuan ($15.60) per sow subsidy and introduce other policies to encourage herd expansion. Despite the expected recovery in pork production, China’s pork imports will continue to rise due to strong pork demand and competitive pricing on imports. Overall, pork imports in 2012 are expected to increase eight per cent to 480,000 metric tons (CWE), while pork offal imports in 2012 are expected to increase 10 per cent to over 700,000 MT, product weight (PW). Pork exports in 2012 are forecast to rise five per cent to 272,000 MT (CWE) due to strong demand in China’s traditional Asian export markets.

China’s live swine imports in 2012 are forecast at 12,000 head, up 20 per cent from estimated imports in 2011. Imports in 2011 are forecast to nearly double to 10,000 head. Nearly all these imports are breeding swine. Sales are rising due to a strong need for improved genetics, high pork market prices, and China’s aforementioned decision this summer to restore sow subsidies.

Cattle and Beef

Post forecasts China’s beef cow beginning stocks in 2012 will fall nearly one per cent to 46.2 million head from an estimated 46.5 million head in 2011. Dairy cow beginning stocks are forecast to increase three per cent to nearly 12.8 million head boosted by China’s continued dairy herd rebuilding following herd loss in the wake of the 2008 nationwide melamine scandal. However, calf crop production in 2012 is expected to decline nearly one per cent to 40.6 million head from an estimated 40.9 million head in 2011, reducing China’s 2012 beef production to 5.5 MMT from an estimated 5.6 MMT in the previous year.

The continued slide in Chinese beef production is due primarily to comparatively low returns for raising cattle compared to swine and poultry. The longer production time for beef cattle, combined with continued high corn and other feed prices (corn price is up 17 per cent over last year) are significant disincentives for small producers who account for the vast majority of China’s cattle operations (see table 1). Chinese producers are also challenged by limited local availability and rising prices for silage. China imported 99,700 MT of alfalfa in January-June 2011 with an average price over $300 per ton, up 14 per cent from the period in 2010. Silage is often made of only corn stalks after corn is harvested. Unstable nutrition in feed makes the cattle fattening period longer than normal, which further reduces incentive to increase herd size. Finally, high labor costs because of short labor supplies, and rising costs for energy, transportation, and water are also limiting beef output growth potential.

Table 1. Number of Chinese Beef Cattle Farms at Different Herd Sizes, 2007-2009

Unlike many swine and poultry farms that are owned by processing plants, backyard and small cattle operators do not have their own channel to deliver cattle to slaughterhouses. They point to the predominant cattle marketing pattern, where intermediaries do the bulk of the purchasing from backyard farmers and keep farm returns low, as another significant factor in low enthusiasm for raising cattle. This predominance of this pattern is expected to stay roughly unchanged for the foreseeable future.

Finally, tightening farm credit is another bottleneck hampering cattle production. On June 20, 2011, China raised its domestic bank saving reserve ratio to 21.5 per cent due to inflation. Tighter credit availability makes local banks less willing to provide loans to uncertain long-term livestock projects such as raising beef cattle.

China’s total beef consumption in 2012 is forecast to decline nearly one per cent to 5.5 MMT from estimated 5.6 MMT in 2011 due to smaller domestic production, making per capita consumption roughly unchanged at 4.1 kilograms.

Despite sharply higher prices of competing meats in China this year, beef continues to be China’s priciest meat item, which limits consumption growth. In July 2011, China’s average beef price was RMB36.9 ($5.77) per kilogram, up 11 per cent from July 2010. Meanwhile, pork price jumped 67 per cent this year, but is still significantly cheaper at RMB29.3 ($4,58) per kilogram. Broiler price was up 24 per cent to RMB2.39 ($2.73) per kilogram from July 2010. In addition to a comparatively high price, strong demand for fresh meat in China also limits beef demand growth. Unlike pork, which is mainly produced in grain production areas near large cities, 25 per cent of beef is produced in grassland areas in West China, frozen and shipped to major markets. High distribution costs and an unreliable cold chain are additional constraints. With the exception of western regions, where mutton and beef account for a large share of total meat consumption, beef is mainly consumed in wealthier urban areas. This demand is fueled by an expanding middle class in these markets. China’s urbanization will continue to be a key driver in future beef consumption growth.

Lower 2012 domestic production will encourage higher imports. China’s direct beef imports in 2012 are forecast to increase seven per cent to 45,000 MT from an estimated 42,000 MT (CWE) in 2011. Shipments from Canada will account for a significant portion of this growth following China’s decision this year to lift its ban on Canadian boneless beef from cattle under 30 months old. Once these shipments begin, this will be the first entry for North American beef since China’s decisions in 2003 to ban imports from Canada and the United States following detections of BSE. Negotiations toward a market opening for US beef are expected to resume later this year.

Imports in 2012 are forecast at 75,000 head, a four per cent recovery from an estimated 15 per cent decline in the previous year. Dairy cows will continue to account for nearly all sales. In 2011, imports are well below expectations. Short cow supplies from Australia (China’s largest cow supplier) and considerably higher international cattle prices have constrained sales this year. However, the long-term prospects for cattle imports are bright as China continues to rebuild its dairy herd following the losses suffered due to weak demand in the wake of the nationwide melamine scandal in 2008. China only allows imports from Australia, New Zealand, and Uruguay.

Smaller domestic cattle production will discourage live cattle exports. Overall, China’s live cattle exports in 2012 are forecast to decline three per cent to 29,000 head from an estimated 30,000 head in the previous year. The exports are limited to nearby Hong Kong and Macau for fresh beef consumption. Higher fresh beef exports to these markets will partly substitute for the decline in live cattle sales.

China’s beef exports in 2012 are expected to rise over five per cent to 58,000 MT (CWE) from estimated 55,000 MT (CWE) in the previous year fueled by strong demand in China’s traditional export markets. The export unit price in January-June 2011 climbed 12 per cent to $5,025.7 per ton, hitting at least a 10- year record high. Higher sales to China’s traditional export markets, Hong Kong, Japan, Kyrgyzstan, and the Middle East will account for all of the gains. Hong Kong will continue to serve as China’s top beef export market where Chinese beef is price competitive. Part of exports to Hong Kong has already shift from frozen beef to fresh and chilled beef as Hong Kong lifted its ban on China’s fresh and chilled beef in December 2010.

If traders wish to ship meat products through China to third countries, the exporter’s handler in mainland China will need to get a trans-shipment permit from a local CIQ office (China Entry-Exit Inspection and Quarantine Bureau under AQSIQ). The following are the permit requirements according to AQSIQ/Import and Export Food Safety Bureau:

1. Entry permit from the importing country
2. Copy of contract between the importer and exporter
3. Copy of the FSIS export health certificate
4. Declaration of transportation route in China

Upon arrival, CIQ will check whether the information on the FSIS export health certificate, shipping documents, and container information are in compliance. CIQ officials will also check whether container seals are broken. If necessary, CIQ officials may escort the transshipments.

Officially, AQSIQ does not allow trans-shipments of meat prohibited in mainland China to third countries, including beef banned due to BSE, as well as poultry meat from states banned due to AI (Arkansas, PA, Texas, Virginia).

Swine and Pork

Fueled by sharply higher prices in 2011, China’s pork producers are steadily expanding herd size and this will help boost pork output beginning early 2012. Production growth is also being supported by China’s decision in July 2011 to resume a 100 yuan ($15.60) per sow subsidy and introduce other policies to encourage herd expansion. Overall, production is expected to reach 51.3 million tons, up four per cent from 2011.

In 2011, Post estimates China’s pork supplies will fall three per cent. Reduced supply this year is due primarily to low prices through the first half of 2010, which encouraged many smaller producers to exit hog farming, followed unusually severe and persistent outbreaks animal disease, such as foot and mouth disease (FMD), swine blue ear disease (PRRS), and pig epidemic diarrhea among piglets in late 2010 and early 2011. Lower hog supplies coupled with continued strong pork demand have created sharply higher hog prices this year, reaching 18.75 yuan ($2.93) per kilogram in July, up 68 per cent compared to July 2010. The expectation that prices will continue at a high level has encouraged herd expansion in 2011. With strong demand for piglets and tight supplies, piglet price has soared to over 34 yuan ($5.40) per kilogram in July, more than double the level in July 2010.

Surging pork prices in China this year (see Chart 3) became a top policy concern in 2011 as pork is a staple in China’s diet and affordable pork is considered important for social stability. In response, the leadership provided additional incentives this summer to expand herd size and reduce pork prices for China’s consumers, by improving hog farm returns. In July 2011, policymakers resumed productive sow subsidies providing 100 yuan ($15.6) per animal. The total annual value of this support is estimated at RMB2.5 billion ($391 million).

Sow subsidies were initially introduced in 2007 to rebuild herd size following a severe outbreak of blue ear disease. These were suspended in mid-2010 due to oversupply. Other measures introduced this summer include higher producer supports in case of disease, such as raising payments for each culled animal (from 600 yuan ($94) to 800 yuan ($125) and each dead hog presented at slaughter (from 500 yuan ($78.1) to 800 yuan ($125) per animal.

While production will expand next year, it is possible total hog inventories may not reach early 2010 levels until beyond 2012. Enthusiasm for raising pigs among small backyard operators (which account for the great majority of hog farms and output) is being dampened by high costs of feed, with corn prices in China this summer topping RMB 2,330 ($364), up 17 per cent from the same month last year. Threats of animal disease are another concern, fueled by persistent doubts among small producers about the effectiveness of animal drugs for FMD and PRRS provided free by the government. Small producers also fear another cycle of oversupply and low prices in the future. Finally, continuing wage hikes for migrant workers in China’s medium and large-sized cities make hog farming less attractive by comparison for many small farmers. Meanwhile, large scale operators report that difficulties in acquiring additional farm land are hampering their expansion plans. Combined these factors will limit production gains and support higher than normal prices in 2012.

Table 2: Number of Chinese Swine Farms at Different Herd Sizes, 2007-2009

China resumes subsidies for large scale hog farms

In continuation of China’s policy to encourage more scale, standardization, modernization, and integration in Chinese hog farming, the central government has reportedly resumed payments for large- sized operations, under a scheme entitled the “large-scale standardized swine farm subsidy”. While subsidy amounts have not yet been announced, the minimum farm size to be eligible for the payment is at least an annual slaughter of 5,000 head. This is up from 500 head for a similar subsidy that was introduced in 2009, entitled the “standardized swine raising farm subsidy”. Payments were suspended in 2010 due to hog oversupply. In 2009, farms with 5,000 head or more were eligible for a one-time payment of RMB800,000 ($126,000). Farms that received the payment in 2009 will not be eligible in 2011. In addition to minimum herd size, farms must meet certain conditions to be eligible, including a requirement that they are either new or improved.

Total and per capita pork consumption in 2012 on the rise

With the expected increase in domestic pork production and higher pork imports, China’s total pork consumption in 2012 is forecast to increase nearly four per cent to 51.5 MMT from estimated 49.7 MMT in the previous year. Per capita consumption will reach 38 kilograms, up from 37 kilograms in 2011.

China’s 2011 pork consumption is forecast three per cent downward, due to sharply higher domestic pork prices caused by a smaller slaughter, which will drive part of Chinese consumption to switch to cheaper poultry meat or red variety meats in 2011.

Swine and pork imports forecast higher in 2012

With only moderate growth in domestic pork production and high domestic pork prices, China’s pork imports will continue higher through 2012. Pork imports in 2012 are forecast to increase eight per cent to 480,000 MT. Pork offal imports in 2012 are forecast to increase 15 per cent to over 700,000 MT.

A significant change in China’s imports in 2011 is that direct shipments are on the rise, while Hong Kong re-exports to China are decreasing. For direct shipments alone, China’s market size for imported pork in 2011 is about $351 million with US exports accounting for 42 per cent of the total market. Imports of pork offal in 2011 could exceed $1.2 billion. The United States currently accounts for 58 per cent of China’s total pork offal imports. Offal will continue to dominate China’s total pork product imports for the foreseeable future.

China’s live swine imports in 2012 are forecast at 12,000 head, a 20 per cent increase from estimated imports in 2011. Imports in 2011 are forecast to nearly double to 10,000 head. Nearly all these imports are breeding swine. Sales are rising due to a strong need for improved genetics, high pork market prices, and China’s aforementioned decision in July 2011 to resume sow subsidies of 100 yuan ($1.56) for each productive sow. China lifted its H1N1 ban on US live swine in April 2011 and US sales are gradually picking up as US exporters resume outreach to Chinese buyers. However, Chinese buyers report a shift in preference to swine from the EU and US exporters will need to expand marketing efforts to restore US dominance of the Chinese live swine import market prior to the 2009 H1N1 ban. In the first half of 2011, the United Kingdom and France accounted for 80 per cent of China’s total swine imports.

Pork exports in 2012 are forecast to rise eight per cent, while live swine exports should remain flat

With domestic pork production climbing, China’s pork exports in 2012 are forecast at 280,000 MT (CWE), an eight per cent increase from estimated 260,000 MT (CWE) in the previous year, fueled by strong demand in China’s traditional export markets in Asia. Most gains will come from Malaysia and the Philippines, where Chinese export prices are competitive. Exports in 2011 are forecast lower than the previous estimate due to smaller domestic slaughter and pork production impacted by animal diseases.

China’s live swine exports to Hong Kong and Macau for local fresh meat consumption in 2012 are forecast to be roughly unchanged at 1.65 million head. These two destinations account for all of China’s live hog exports and export growth continues to be dampened by limited slaughter capacity and flat demand in these markets.

Further Reading

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