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USDA GAIN: Livestock and Products


07 September 2012

USDA GAIN: Hong Kong Livestock and Products AnnualUSDA GAIN: Hong Kong Livestock and Products Annual

U.S. pork exports to Hong Kong are performing well in 2012. The first six months of 2012 already reached $48 million.

USDA GAIN: Livestock and Products

Report Highlights:

The rise is greatly due to the increased re-exports of U.S. pork products to China via Hong Kong. Also, Hong Kong currency’s peg to U.S. dollar has made U.S. products more competitive when Hong Kong dollars depreciates against other currencies. The increased use of U.S. commodity cuts in fast food chains and Chinese restaurants also have played a role in augmenting Hong Kong imports of U.S. pork. Rising global feed prices likely will impact Hong Kong in 2013 when supply of live pigs from China to Hong Kong will be reduced as a result of high pork prices in China domestically.

Summary:

Pork production in 2012 is forecast to rise by 3 percent totaling 130,000 MT because supply of live pigs from China has increased following the slackened inflation of pork prices in China compared to 2011. Rising global feed prices are expected to impact the supply of live pigs to Hong Kong next year. With the expected increase in feed prices, there should be upward pressure on pork in China. A buoyant domestic market in China will reduce the incentive of selling live pigs to Hong Kong. Given China’s pledge of providing Hong Kong with adequate food producing animals under a quota system, pork production in 2013 will still reach 128,000 MT, slightly decreasing 1.5 percent from the 2012 forecast level.

Pork consumption in 2012 rose slightly to 568,000 MT, representing a modest rise of 2 percent. Pork remains the most favored meat for Hong Kong consumers. Amidst the bigger price increase rate for beef and chicken, there has been some substitution effect towards pork consumption in 2012. The long term trend is the increasing acceptance of chilled pork from China which serves as an alternative to freshly slaughtered pork.

U.S. pork exports to Hong Kong are performing well in 2012. The value of U.S. exports for the first six months of 2012 already reached $48 million (vs. $27 million in the same six-month period of 2011) . The rise is greatly due to the increased re-exports of U.S. pork products to China via Hong Kong. Also, competitive prices are a determining factor in successfully expanding the U.S. market share from 5 percent in 2011 to 8 percent in 2012. Hong Kong currency’s peg to U.S. dollar has made U.S. products more competitive as the Hong Kong dollars depreciates against other currencies. The increased use of U.S. commodity cuts in fast food chains and Chinese restaurants also has had a role to play in augmenting Hong Kong imports of U.S. pork.

Hong Kong’s imports of U.S. offals amounted to $78 million in January – June 2012, far exceeding pork products. The majority of the products are for re-exports to China. However, the ractopamine factor lingering over U.S. pork and offals has triggered the increased imports of European offals, particularly those from Germany. Starting 2011, Germany overtook the U.S. as the largest supplier of offals to the Hong Kong market. Customers in China find the quality of European products acceptable.

However, ractopamine is not an issue in Hong Kong as it is not a prohibited substance according to Hong Kong food law.

Production:

Production in 2011 reached 126,000 MT rising 5 percent compared to 2010. The increase was mainly due to the revised estimated weight of live pigs imported from China and those raised locally to 96 kg and 80 kg respectively in 2011. In 2010, the average weight of imported and local pigs weighed 86 kg and 68 kg instead.

In terms of number of live pigs, production in 2011 decreased 9 percent amounting to a total of 1,557,170, with imports from China accounting for 94 percent. Local supplies constituted the remaining 6 percent. The high pork prices in China last year reduced farmers’ incentive to sell to Hong Kong as they already secured a good return by selling locally. Thus, Hong Kong had recorded a 10 percent decline in the supply of live pigs imported from China in 2011. In contrast, the local supply increased by 5 percent (Table 1).

Every year, the Hong Kong government will reach an agreement with the Chinese mainland authority on the annual quota of live pigs to be supplied to Hong Kong the following year. Under the agreement, the quota is set at 1.73 million head for 2012. This quota agreement is based on the consideration that there is adequate supply of food producing animals to Hong Kong instead of limiting imports to protect the local industry.

In view of expected increases in feed prices for the remainder of 2012, analysts predicted that there is pressure for farmers to slaughter pigs for the market as early as possible. Thus, this attempt to cut feed costs might increase production in the near future and will have downward pressure on prices and there will be adequate supply of live pigs to Hong Kong. Production for 2012 is expected to rise by 3 percent reaching 130,000 MT or 1,612,700 head.

However, the supply of live pigs for 2013 will likely be reduced because of the impact of rising global food prices. It usually takes seven months to raise a piglet for the market, the full effect of high crop prices on pork supply in China is likely to show up in 2013. China’s pork prices in 2013 are expected to rise due to reduced production following high global commodity prices. Consequently, the supply of live pigs to Hong Kong will be affected.

The supply of live pigs raised locally is very stable. The number of farms remains at about 43, producing 92,959 head of live pigs in 2011 or 6 percent of total supplies. However, the average weight is about 96 kg, heavier than the 80 kg average weight of pigs imported from China. Local production for 2012 is expected to rise at least 4 percent given the expected rise in pork prices. For the first six months of 2012, Hong Kong imported a total of 623 breeding pigs compared to 100 head in the same period of 2011. Hence, local production in the late 2012 and 2013 is expected to rise. Nonetheless, increased local production will remain between 6 to 7 percent of total supplies.

Consumption:

Hong Kong is a mature market with a population of 7.2 million growing at a rate of 0.9 percent. However, Hong Kong continues to see significant increases in tourist visitors, numbering over 42 million in 2011 (representing a jump of 16 percent from 2011). Under these conditions, pork consumption is expected to rise modestly at less than 2 percent to 568,000 MT in 2012.

Hong Kong people eat pork more than any other meat items such as chicken and beef. In 2011, consumption of fresh pork and chilled/frozen pork amounted to 126,061 MT and 331,941 MT respectively (table 4). In general, fresh pork is consumed in households. Chilled and frozen meats are usually used in catering industries. Frozen meats are regarded as inferior goods in Chinese recipe. However, chilled pork from China started to get into Hong Kong market in 2006 to serve as an alternative for household consumption at a more competitive price. The price of 1 kg of chilled pork is about $0.85 -$1.27 lower than that of fresh lean pork. This price difference is good enough to encourage consumers to adjust their consumption pattern particularly when the inflation rate is high. (Hong Kong’s year-on-year inflation rate in June 2012 was 3.7 percent and food prices alone rose 7.1 percent.) Given this price incentive coupled with the gradual receptivity of chilled/frozen products, the consumption of chilled pork from China increased from around 1,333 MT in 2006 to 15,566 MT in 2011.

In 2012, different meat supplies have had varying increase in prices. Pork, compared to beef and chicken, experienced the lowest price increases as a result of increased live pig supplies from China. As Hong Kong consumers are price sensitive particularly when food inflation is prevailing, the relatively lower increase in retail prices of pork seems to have encouraged some consumers to replace some beef and chicken consumption to pork consumption.

The 2012 wholesale prices of live pigs started to drop as a result of increased supply from China. Between January – May 2012, average wholesale prices of live pigs decreased by 8 percent compared to the entire year of 2011 (table 2). While retail prices still experienced a price increase ranging from 3 to 4 percent depending on the cuts (table 3), the rate of increase is still less than those for beef and chicken. Beef prices increased significantly between 10 to 12 percent and chicken 5 percent.

To respond to complaints that the trade still has raised the retail prices of pork despite of lower wholesale pig prices, the industry explained that there are other factors such as labor costs that have accounted for the price increase in meat supplies. Thus they argue that the lower wholesale prices have helped keep retail prices from increasing even further.

Trade:
U.S. Supplies

U.S. pork supplies to Hong Kong in 2012 are expected to reach $100 million, rising over 33 percent compared to 2011 and expanding U.S. market share from 5 to 8 percent. The rise is in large part due to the increased re-exports of U.S. pork products to China via Hong Kong. Hong Kong’s re-exports of U.S. pork products increased over 34 percent in the first six months of 2012 (table 6). With the expected upward pressure on pork prices in China in 2013 as a result of rising global feed prices, Hong Kong’s re-exports of U.S. pork to China is expected to surge so as to meet great demand in China. As such, the forecast of Hong Kong’s pork imports from the U.S. in 2013 is to rise further. While Hong Kong still plays a role in re-export trade to China, it is discernible that direct shipment to China has been increasing at a very significant rate of 134 percent in the first half year of 2012 (table 7).

Another reason that prompted the rise of U.S. products to Hong Kong is the relatively smaller increase in average price of U.S. products compared to the major supplier of China. There is always a correlation between market share and price changes. While China’s market share tremendously shrank from 34 to 25 percent following a 25 percent increase in average price between January – June 2011 and 2012, the market share of U.S. supplies rose from 5 percent to 8 percent during the same period given its relatively smaller rise in average price (table 8).

The Hong Kong currency is pegged to the U.S. dollar. When the Hong Kong dollar depreciated against other currencies, U.S. products became more price-competitive as a result of the currency peg. Importers also commented that they have received very competitive offers from U.S. suppliers because products have been rejected in other markets as a result of reasons such as ractopamine and quota.

The increased use of U.S. commodity cuts in Chinese restaurants and fast food chains has also triggered the rising demand for U.S. frozen pork in the Hong Kong market. U.S. frozen pork imports rose by 151 percent between January – June 2011 and January – June 2012 (table 9).

U.S. chilled pork is regarded as a premium product. It is predominantly retained in Hong Kong for domestic use. They are supplied to high-end restaurants and retail outlets. Key competitors for this niche market are products from Canada and Australia.

Hong Kong is expected to import $156 million of U.S. pork offals in 2012, at a level even higher than pork products. Offals account for the major share of Hong Kong’s pork products from the U.S. because they are largely re-exported to China where there is huge demand. Almost 100 percent of Hong Kong’s offals imports from the world was re-exported between the first six months of 2012 (table 10). Popular offal items include front and hind feet, stomach, kidneys, hearts, and tongues. Importers indicated that the product specification of U.S. offals, such as the trimming of tongues and scalding of stomach, can meet their Chinese clients’ expectation, thus U.S. offals are popular in China.

Other Suppliers

China is the largest supplier of pork products to Hong Kong. However, the high pork prices in China have pushed up average supply cost of pork products to Hong Kong by 25 percent in January – June 2012 compared to the same period last year, reducing the market share from 34 to 25 percent. Of all pork products, China is the key supplier for chilled pork (89%) and processed pork products (27%) to Hong Kong, exporting $20 million and $65 million respectively in the first six months of 2012.

Chilled pork from China is largely consumed in households and Chinese restaurants. They are imported as an option to replace freshly slaughtered pork. On the front of processed pork products, China supplies a large amount of relatively more economical ham and sausages supplying the fast food chains and wet markets. Additionally, the majority of meat balls and Chinese dim-sum are processed in China supplying the Chinese restaurants in Hong Kong with the benefit of economies of scale. These commodities are too costly to be produced by professional chefs in Hong Kong.

For frozen pork products, Brazil is the largest supplier accounting for a market share of 34 percent. Stimulated by the lower average supply cost and the reduced supply from China, the supply tremendously rose by 51 percent in January – June 2012 compared to the same period in 2011.

In recent years, Spain has successfully established a foothold in the Hong Kong market in the selling of high-end ham. Iberico ham and dry cured ham are well-received in Hong Kong. They are promoted and sold at high-end supermarkets. That explained why Hong Kong’s imports of processed pork products from Spain was able to demonstrate strong growth of 46 percent totaling $46 million in the first six months of 2012, following a 71 percent growth in 2011 at an import level of $89 million (table 14).

Re-exports

Hong Kong maintains its significant role as an re-export center for meat shipments to China. Despite more direct shipments to China in the past few years given the costly terminal handling fees in Hong Kong, the decision makers of many business transactions are Hong Kong traders.

About 24 and 100 percent of Hong Kong’s pork and offals imports respectively were re-exported in January – June 2012. China is the largest re-export market followed by Vietnam.

U.S. shipments to China are significantly affected by China’s prohibition on ractopamine. Reportedly, the Chinese government has been conducting surveillance on U.S. products to test against ractopamine. Importers indicated that some of their U.S. suppliers are seriously considering to stop using ractopamine in their swine supplies in order to have access to the China market.

The ractopamine serves as a catalyst stimulating increasing imports of European offals shipments to China. Offals from Germany and Netherlands are very popular in China. As the majority of Hong Kong’s offal imports are for re-exports, their import figures to Hong Kong are able to reflect their performance in China. The table below (table 15) indicated that the market share of offals from Europe increased by varying degree whereas that from the U.S. decreased from 26 percent in 2008 to 12 percent in 2012.

Reportedly some European products, which do not have access to the China market, are repackaged in Hong Kong and re-exported as U.S. products. It was reported that a Hong Kong company was prosecuted for the violation of the “Trade Description Ordinance” when his German products were found repackaged as U.S. products and were ready to be shipped to China. The shipment involved a total of 270 boxes of pork hind feet with an approximate amount of US$87,000. The company was fined US$3,600.

As there existed the situation that European products were repackaged and re-exported as U.S. products, it explained why Hong Kong’s re-export figures for U.S. pork products would far exceed imports as some of the re-exports were de-facto originated from Europe. In stark contrast, trade statistics indicate that a large amount of European offals imports were retained in Hong Kong, but trade contacts contend that in reality these products were likely re-exported out of Hong Kong as U.S. products (table 16).

Policy:

Importers complain that the Hong Kong government has stepped up inspection rate for imports regardless country of origin. To allow inspectors to do the inspection, shipments have to be taken to warehouses and cannot be released before inspection. Importers complain that there are not enough warehouses in Hong Kong and the entire procedure will incur additional costs for them.

Importers expressed their concerns to the Hong Kong Food and Environmental Hygiene Department. The government explained that the random checking procedure has been in place for years. It was temporarily interrupted since last March following the nuclear incident in Japan because manpower was arranged for inspecting food imports from Japan. The random checking procedure for meat products has gradually resumed since early 2012, thus giving an impression that inspection has been stepped up.

In response to meat importers’ request to reduce meat inspection rate each day, the FEHD agreed to lower the inspection rate and will monitor the situation on the grounds that meat inspection in the last 3 years has been satisfactory and the fact that there is lower risk for frozen meats than chilled meat. The FEHD emphasized that inspection will be maintained at a rate which is sufficient to monitor the safety of meat imports.

To expediting sampling and shipment release, the FEHD also agreed to increase manpower to complete the process within 10 working days, starting from the date FEHD receives product arriving notification or shipment arrival date (whichever is later).

However, the FEHD rejected the request to take samples at Customs counter at the Terminal because of food safety concerns as Customs facilities are not meant for meat inspection.

September 2012

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