Executive Summary

Pork production in 2009 is expected to rise by 3 per cent to 46 MMT compared to the previous year as China continues to recover from a devastating outbreak of PRRS (blue-ear disease) in 2007. Continued government support for swine production, including nationwide and local subsidies to sow producers, and reduced PRRS detections, will fuel modest production gains. Post believes production could begin approaching pre-PRRS levels by the end of 2009.

Pork Production Recovering Quickly

Post forecasts China’s pork production in 2009 will rise 3 per cent to 46 MMT, continuing a recovery from the devastating PRRS disease outbreak in 2007. Reduced PRRS detections, expected lower feed costs due to a record grain harvest in 2008, and continued government subsidies for sow production will help foster the modest gains. Pig crop production in 2009 is forecast to increase by three percent based on a one percent increase in the previous year.

Post believes China’s pork production will begin approaching pre-PRRS levels by the end of 2009.

While Post expects continued production gains, feed costs will continue to challenge Chinese pork producers. Feed accounts for 70 per cent of the total swine production costs in China. Producers prefer rations that contain 60-70 per cent corn. While corn and other feed costs have gradually fallen in recent months, they remain more than 20 per cent higher than in the same period in 2007. Meanwhile, hog and pork prices have decreased over 10 per cent due to increased production. With lower prices and continued high feed costs, some swine farmers, especially backyard and small operators, fear losing money on their operations. This fear could translate into dampened enthusiasm for increasing production in 2009.

Impact of New Corporate Income Law on Swine Production

On 11 December, 2007, the State Council announced the “Regulation on Implementing the Law of the People’s Republic of China on Corporate Income Tax” effective 1 January, 2008. The new regulation exempts companies involved in animal and poultry rearing or primary simple processing from paying the 25 per cent tax on corporate income . This new tax law has already attracted large domestic and foreign investment in swine rearing. For example, the China National Cereals, Oils and Foodstuffs Corp. (COFCO), the country's largest oils and food importer and exporter, started a five-year pig raising project, investing US $1.36 billion in Hubei Province, Central China. COFCO will build a 500,000 head reproducible sow breeding base, a 10 million live pig raising demonstration project, and establish centers for pig breeding technology research and swine disease prevention. In addition, a US investment bank is reported to have bought over 10 farms in Jiangxi and Fujian provinces. Foreign companies are also investing through joint ventures with domestic partners. The Tangrenshen Company in Hunan Province recently undertook a new 10 million swine project, which will be completed in the next few years. FAS/Beijing believes these investments will show returns primarily after 2009 because it should take at least two years to begin production. These developments will translate into more concentrated swine rearing in the future, pushing more backyard and small operators out of the swine business.

Impact of Strategic Meat Reserves for Frozen Meat

Most of China’s strategic reserves are pork. Beef and mutton reserves are small and designated for specific consumers. There is no reserve for broiler meat, because broiler production cycles are short and producers can easily recover from supply disruptions. Most strategic reserves in China are held as live animals because of the high costs associated with storage in cold warehouses. The Ministry of Commerce (MOFCOM) identifies and approves swine farms for live reserves. The government provides certain subsidies to guarantee an adequate swine supply when needed. If there is no need four months into the future, farmers can sell their swine and replace them with new animals. The disruption in production caused by PRRS, and natural disasters like the May 2008 earthquake in Sichuan Province and the ice storm in South China in early 2008, forced the government to increase frozen meat reserves to guarantee an adequate supply. MOFCOM requested provincial level reserves large enough to supply China’s more than 500 million urban residents for seven days. Imported pork accounts for most of China’s pork reserves. Smithfield, a US company, is the largest supplier to the central reserves. However, China’s imports in 2009 for central reserves are expected lower due to improving domestic production.

Pork Consumption Recovering Quickly

China’s pork consumption in 2009 is forecast to continue recovering, rising 3 per cent to 46.2 MMT, up from the revised 2008 estimate of 44.9 MMT in 2008. As producers have improved control of PRRS, consumer confidence has recovered quickly. Pork is still the most popular animal protein accounting for over 60 per cent of China’s total meat consumption. For much of 2008, sharply higher pork prices due to reduced supplies provoked the Chinese government to take a number of steps to reduce prices and assist consumers. These included providing subsidies at RMB 30-60 ($4.40-8.70) per person per month for the lowest-income consumers to buy meat for six months in 2008. The government also capped meat prices in February 2008 following the winter ice storm that swept South and Central China and caused transportation and distribution channel disruptions. China also temporarily reduced its frozen pork import tariffs from 12 per cent down to six percent from 1 June to 31 December, 2008 to boost imports to help reduce upward price pressure. Domestic pork prices have since fallen significantly in response to large imports and increased dome stic production. Consumers have increasingly switched back to pork consumption from poultry because of lower pork prices. This trend is expected to continue into 2009.

Pork Imports to Decrease Due To Rising Domestic Production

Post forecasts China’s pork imports in 2009 to fall to 360,000 MT, down significantly from the revised estimate of 480,000 MT in 2008. Increased domestic production and slowed Chinese economic growth are expected to constrain imports.

China is the sixth largest export market for US pork. US exports to China from January to October 2008 increased eight times to 170,553 MT valued at $304.7 million through direct shipments accounting for 61 per cent of the total value of China’s imports. US exports to China via Hong Kong re-exports during the same period reached 30,844 MT valued at HK$361.9 million. A substantial portion of US pork is used for China’s strategic reserves, a government subsidized program used to stabilize the market and ensure steady supplies. In 2009, China’s increased domestic pork production and declining pork prices will reduce the need for strategic reserve imports. If needed, the Government may choose to increase live animal reserves when domestic swine are available and price competitive. Imports will also be slowed by higher meat import tariffs, which will return to 12 per cent from 6 per cent in January 2009.

China’s imports from the EU (led by France and Denmark) have increased fast due to competitive prices. A significant factor is facilities in the United States and Canada have to make often costly adjustments to operations to meet China’s zero tolerance for ractopamine residues, while the EU does not since use of ractopamine is forbidden in the EU. US exporters are often warned or suspended by AQSIQ if ractopamine residues are found. USDA/FAS and FDA are communicating with MOA to encourage a science-based policy on ractopamine.

Decreasing Live Swine and Pork Exports

China’s live swine exports in 2009 are forecast to decrease by 3 per cent to 1.5 million head from the revised estimate of 1.54 million head in 2008. Pork exports in 2009 are forecast to decrease 7 per cent to 200,000 MT. The September 2008 contamination of Chinese milk and animal feed with the industrial chemical melamine has reduced overall foreign demand for related products due to food safety concerns. Japan and Kyrgyzstan, China’s second and third largest pork export markets, reduced imports from China by 11 and 49 per cent, respectively after the melamine contamination crisis in September 2008, even though China reduced its export prices. Hong Kong will remain China’s dominant export market in 2009.

Further Reading

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January 2009