SITUATION AND OUTLOOK

The political landscape in Korea is changing. On February 25, a new conservative president, Lee Myung-bak, was sworn into office after 10 years of liberal rule. During his campaign the new president made a “747” jumbo election pledge to revive Korea's economy by achieving seven percent annual growth, per-capita national income of $40,000 and making Korea the world’s seventh largest economy in 10 years. Currently, exports are still strong, but the world economy is slowing and Korea may begin to feel the effects in the second half of this year. Imports are forecast to rise considerably this year due to high oil, grain and raw material prices. As a result, the economic forecast for 2008 is expected to be just under five percent.

With a new president, comes a new government. The new Minister for Food, Agriculture, Forestry & Fisheries (MIFAFF),, Jung Un-chun (also spelled Chung Woon-chun) has stated that “the country’s agriculture policy should no longer be passive and protective, but instead should be proactive and aggressive.” As a result, Jung’s nomination drew mixed reviews from rank-and-file farmers. The new Minister is likely to deal with the beef issue, while at the same time explore ways to provide additional debt relief to farmers in order to gain their support for the Korea-U.S. free trade agreement.

Imports of beef are projected to remain stable in 2008; although the forecast was dropped slightly on account of higher slaughter rates. This increase in domestic production will result in a 5 percent increase in consumption compared to last year. The unmet demand for beef in Korea is quite high given that per capita consumption in 2007 (7.5 kg) is still below the 2003 level (8.1 kg) and well below the level in the United States (about 30.5 kg).

Increased swine slaughter in 2008 resulting in higher expected domestic production is the main reason that the forecast for pork imports was lowered. Imports of pork will increase year on year due to lower international prices. Increased U.S. swine production and the steady decline in tariff rates for Chilean pork will make imported pork more price competitive this year. The demand for pork, even though it is at record levels (19.7 kg), probably still has room for growth.

Domestic prices for live cattle and swine depend on slaughter rates. Higher prices for imported corn and soybeans, ingredients used locally in compound livestock feeds, will increase costs for the farmer. Judging by past history, farmers are likely to sell off their cattle at higher rates if their costs increase. Higher slaughter rates will result in lower live animal prices and lower wholesale prices for beef and pork; however, this does not necessarily translate into lower retail prices for the consumer. Retail prices tend to remain stable, changing only when external pressures force retailers to lower their prices. Absent U.S beef, the price of imported beef will increase as the higher costs of production in exporting countries are passed on to buyers.

PORK AND PORK PRODUCTS

Production

Farmers are expected to reduce inventory in 2008 due to the drop in swine prices, increased feed prices, and increasingly stricter restrictions on manure treatment. The number of sows and live swine prices peaked in June 2007 causing record high swine inventory in September 2007. In response, live swine prices dropped 24.7 percent in January 2008 from the peak level in June 2007.

Feed production for rearing pigs in January 2008 dropped by 6.5 percent from its peak level in October 2007. This indicates that the inventory will continue to drop at least for the first half of 2008. The increase in slaughter is expected to come mostly from smaller farms (under, 1,000 heads). Inventory dropped by 53,397 heads in the last quarter of 2007, of which 92.6 percent was from the smaller farms. The larger farms that raise over 10,000 heads increased their herd size during this period.

Corn prices are projected to increase by 13 percent in 2008, according to the OECD. Corn accounts for 55.5 percent of the compound feed ratio for swine. The increase in corn prices is expected to raise compound feed prices by about 7-8 percent. The Korea Rural Economic Research Institute calculates that hog farm incomes drop by 2.27 percent when compound feed prices increase 1 percent.

Proposed new regulations may also have the effect of dampening production. The Ministry of Environment (ME) has proposed regulations that would require facilities, including hog farms, to install equipment to control odors. If this proposal is adopted, it is expected that the smaller, less profitable swine farms will not be able to afford such equipment and may go out of business. In addition, the Ministry of Marine Affairs & Fisheries (MOMAF) is placing restrictions on the amount of livestock manure that can be dumped in the open sea with the target of reducing this amount by 500,000 tons every year. As a result, manure disposal companies are expected to raise their prices by 24 percent in 2008, although increased fuel prices are also contributing to the rise in manure disposal prices. MOMAF has also proposed to implement a requirement in August 2008 that manure disposed in the open sea undergo residue testing for 25 different substances.

Consumption

Koreans continue to eat pork at record levels and are expected to do so until the short beef supply situation is resolved. U.S. pork has a 26.5 percent market share and is sold primarily in the food service sector (65 percent), but also in the retail (25 percent) and processing (10 percent) sectors. The top imported cuts from the United States are Boston butts, Single Ribbed Bellies, and collar butts. Korean consumers prefer the fatty belly meat. According to MIFAFF, Korean consumers purchased pork 3.38 times per month (up from 3.34 times per month in 2006) and spent an average of 33,600 Korean won per month in 2007 (down from 35,960 Korean won in 2006). Pork prices dropped in 2007 due to increased slaughter.

As is the case with beef consumption, Koreans prefer to barbeque their pork, rather than eating processed pork. In 2006, only 12.1 percent of all pork consumed in Korea was processed. This is much lower than in the Japanese market where over 30 percent is processed and in Europe where over 70 percent is processed. In 2006, Korea produced a total of 132,599 tons of processed meat. Among this, 44,156 tons was for sausages, 58,520 tons was for ham and 27,157 tons was for canned meat and other miscellaneous types of processed pork. Despite the fact that Koreans’ favorite cut is pork bellies, Korea produced only 2,756 tons of bacon in 2006, meaning that most pork bellies were barbequed. The processed pork manufacturer is very price sensitive and tends to switch easily among domestic and imported pork.

Pork casings used in the manufacture of sausages are mainly bovine casings imported from Japan; however, Korea still prohibits U.S. pork sausage producers to use the Japanese bovine casings when exporting sausages to Korea. The United States is working with the Korean government to resolve this problem.

The swine industry continues to suffer from livestock diseases. However, as these diseases are not transmittable to human beings, it has not affected the consumption of pork. Also, there has not been any major food safety related issues that would have an impact on pork consumption since 2000 when Korea last had an FMD outbreak.

Trade

In 2008, Korea will import slightly more pork than in 2007 due to the price competitiveness of U.S pork, which accounts for over a quarter of the imported pork market. Total imports of pork reached a record 440,291 tons (carcass weight equivalent) in 2007, an increase of about 9 percent from the previous year. Chile which is the second largest pork exporter to Korea on a value basis will continue to benefit from lower import duties originating from the Korea-Chile FTA. The duty for chilled pork from Chile will drop from 14.8 percent in 2007 to 12.6 percent in 2008. The duty for frozen pork will also drop from 16.7 percent to 14.3 percent during the same period.

If U.S. beef imports resume in 2008, it will have a major impact on the pork market (imports and domestic production) as pork is common a substitute for beef.

Domestic Beef and Pork Policy

The Ministry for Food, Agriculture, Forestry and Fisheries will be caring out various programs to provide support to the livestock sector. The following is a summary of the programs that will be implemented in 2008.

• Project for modernization of livestock farms: A total of 128.7 billion won (around $135.4 million) will go into this project in 2008. Among this amount, 20 percent will be government support, 60 percent will be a loan and the remainder 20 percent will be paid by the farmer. The goal of this project is to modernize the farms to reduce the animal loss and increase the productivity of the farm. In 2008, a total of 515 farms will be chosen for this program (200 Hanwoo farms, 150 swine farms, 75 chicken farms, 10 duck farms and 80 dairy farms).
• Support project for livestock manure treatment facility: The government plants to provide 96 billion won (around $101 million) to farmers and cooperatives for installing facilities for producing compost and liquid fertilizer and constructing liquid manure tanks. With this budget, they will also provide support for constructing liquid fertilizer marketing centers and producing liquid manure spreaders.
• Beef traceability system to be fully implemented: Korea has completed its trial program for the beef traceability system and will enforce this program nationwide as of December 2008. People can insert the product code after visiting the beef traceability website and confirm where the beef came from. The following picture is a banner promoting the system.
  
• Establishment of livestock brand towns: In order to provide access to branded livestock products, the government will provide support for establishing livestock brand towns, where consumers can purchase, eat and enjoy agrotourism in one place by visiting this town. The Government is planning to establish two towns this year and provide support of 1.6 billion won (around $1.7 million) per town.
• Modernization of breeding farms: A total of 13.7 billion won (around $14.4 million) will go into this project in 2008. Among this amount, 70 percent will be provided as a loan (annual interest rate of 3%, 10 year repayment after a 5 year grace period) and the remaining 30 percent will be paid by the breeding farm. The goal of this project is to modernize the breeding farm to reduce the animal loss and increase the productivity of the breeding farm. In 2008, a total of 16 breeding farms will be chosen for this program (10 swine breeding farms, five chicken breeding farms, one duck breeding farm).
• Modernization of the calf auction market: A total of four calf auction markets will receive a loan of up to 500 million won each (around $526,000) for modernizing its facility. (annual interest rate of 3%, 5 year repayment after a 3 year grace period)
• Logistic al support: The government will provide support for purchasing 110 trucks for moving livestock from farms to slaughterhouses in order to mitigate the stress on animals and eradicate animals being trucked in open trucks. A total of 6.5 billion won (about $6.8 million) has been budgeted for this program.
• Fostering of branded names: Korea will continue to provide support for livestock companies to promote branded products.
• Project for eradicating livestock diseases: Korea plans to spend 128.8 billion won (about $135.5 million) in eradicating livestock diseases. They will use this money for vaccination, purchase of equipment, monitoring livestock diseases and providing subsidies to farmers when there is a disease outbreak and they have to dispose of animals in an infected area.

Pork Tariffs and the Korea-U.S. Free Trade Agreement

Currently, frozen pork is subject to a 25 percent tariff and fresh or chilled pork is subject to a 22.5 percent tariff. Once the Korea-U.S. free trade agreement is implemented 90 percent of U.S. pork products will become duty-free on January 1, 2014 regardless of when the agreement actually starts. This includes all frozen and processed pork products. This datecertain duty-free access will allow U.S. pork exports to compete on a level playing field with other third country competitors, such as Chile.

Further Reading

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April 2008