Markets

South Korea Livestock and Products Semi-Annual Report 2011

The FMD crisis is winding down and is expected to come to an end by mid March, according to the USDA Foreign Agricultural Service. While the cattle sector, which was much less impacted, is still set to expand in 2011, the swine industry is reeling after one-third of total inventories were culled.

26 April 2011

7 minute read

Production

The swine and pork industry was hit the hardest by the FMD outbreaks with over 3.3 million head, or one-third of the total inventories, culled in order to contain the spread of the disease. All swine were vaccinated to stem the spread of the disease. Although the FMD crisis is expected to come to an end in mid March with the second round of vaccination now complete, Korea Rural Economic Institute (KREI) is predicting that the local swine industry is likely to recover fully until 2014.

According to a recent government study, there are two reasons why the disease has had a greater impact on the swine sector as opposed to the cattle industry. First, the average size of a swine farm is 1,345 pigs, considerably larger than the average cattle holding with just 17 animals. Second, the creation of the FMD antibody after vaccination takes longer in swine than cattle. While the FMD antibody is present in 100 per cent of cattle in just two weeks after the first vaccination, only 60 per cent of the swine had antibodies against the disease. Three weeks after vaccination, 80 per cent of the swine had FMD antibodies. A week after the second vaccination, 100 per cent of swine had formed antibodies against the disease. The first and second rounds of vaccinations of all swine and cattle were finished on 31 January and 26 February.

The 2011 sow beginning stock number was lowered to 920,000 head to reflect the estimated number of sows culled in December 2010. With the culling of 2.8 million swine since the beginning of the year, though, the current number of sows has dropped significantly since 1 January and is now estimated at 650,000 head, which includes several thousand head of imported breeding stock to rebuild the herd. In light of lower sow numbers combined with the two- to three-month waiting period before restocking FMD-affected farms, the 2011 production estimate (pig crop) is lowered by 28 per cent to 11.1 million head. Production in 2010 has also been revised downward to 14.9 million head to reflect the estimated number of piglets that were culled in December.

In addition to a smaller pig crop, high feed grain prices coupled with rising cost of manure disposal is expected to be a barrier to the rebuilding of swine inventories. Higher waste disposal costs are linked to Korea’s decision to ban the dumping of swine manure into the ocean beginning in 2012. Year end inventories for 2011 are accordingly lowered 20 per cent from the earlier estimate to 19.6 million head.

Although production costs are expected to increase over the coming year, the shortage of locally produced pork resulting from FMD has put considerable pressure on carcass prices, which in turn will spur rebuilding of local pig population for the foreseeable future. In fact, carcass prices soared in January to a record 6,342 per kg. In comparison, during past FMD outbreaks, prices stayed relatively steady before, during and after the incident.

The anticipated implementation of the FTA with the European Union on 1 July 2011, and with the United States, will likely impact domestic production in the future. However, current production estimates do not account for this possibility, but will be revised when the agreements are implemented.

Pork Production

Pork production in 2011 is forecast to drop to 760,000MT, which is the lowest it has been in almost 20 years, due to the lower slaughter numbers resulting from the massive FMD culling. The shortage in domestic pork supply will partially be offset by increased pork imports but pork consumption will still be lower than was previously estimated as consumers substitute other meats including imported beef. The production shortage, as alluded to earlier, has pushed pork prices to record highs and the government has responded by slashing import duties on certain pork cuts to zero.

Trade

On 28 January, in an attempt to curb rising pork prices, the Korean government announced the creation of a special zero duty tariff-rate-quota (TRQ) for selected frozen pork imports during the first half of 2011. The normal tariff rate is 25 per cent. The initial TRQ was 60,000MT, consisting of 10,000MT of frozen pork bellies and 50,000MT of frozen pork cuts for processing. US pork is expected to fill most of the 50,000MT TRQ given its strong price competitiveness and availability. See GAIN KS1104 for more details.

Despite the TRQ, pork prices have remained stubbornly high. On 28 February, in response to growing inflationary concerns the government announced that it would expand the TRQ with an additional 50,000MT allocation for frozen pork bellies bringing the total TRQ to 110,000MT. The government has left the door open to expand the TRQ should prices continue to rise.

The 2011 pork import estimate is raised nearly 200,000MT to 600,000MT because of the shortage of domestic pork. Imports of US pork are expected to fare well due to the creation of the zero duty TRQ and, as noted, are expected to fill most of the 50,000MT of TRQ for processing. But, the EU and Chile are expected to fill nearly all of the 60,000MT frozen pork belly allocation. US pork imports in 2011 are expected to climb to 180,000 MT, up 80 per cent from the previous year.

Source: KOTIS
Product Weight Equivalent basis
Includes: HS 020311, 020312, 020319 (fresh/chilled), HS 020321, 020322, 020329 (frozen), 021011, 021012, 021019, 160241, 160242, and 160249 (processed pork products)

Consumption

Pork consumption in 2011 is forecast at 1.37 million tons, down nearly 12 per cent due to the shortage of domestic pork, high pork prices and consumers shifting to other meat proteins such as poultry, fish and imported red meats.

According to a KREI survey conducted during the first week of February 2011, 34 per cent of consumers chose chicken and about 32 per cent selected fish as the top two substitutes for domestic pork. Imported pork and beef ranked fourth and fifth with a combined 15 per cent of respondents saying they would switch to foreign red meat. Although, not entirely indicative of expected annual sales trends, the survey does show that consumers plan to substitute eating more imported pork and beef compared to Hanwoo beef.

In addition to the above-listed reasons, some consumers have decided to eat other meats instead of domestic pork because of perceived safety concerns. This anxiety, which had been absent during earlier FMD outbreaks, is in part attributed to the widespread and prolonged nature of the disease, which received extensive media coverage showing graphic scenes of culled animals being bulldozed into pits.

Although the number of animals being culled has slowed considerably in recent weeks, the media continues to carry stories about the possible leakage from the burial sites into ground water supplies. Some consumers have also expressed reservations about the safety of domestic pork from vaccinated animals as well as the threat of the disease being passed to humans even though the government has been conducting outreach to reassure the public that local pork is safe.

The consumption estimate for 2010 is revised to reflect increased demand resulting from a combination of factors including: lower retail prices, an aggressive marketing campaign for domestic pork in major discount stores and good weather during the summer grilling season.

A recent KREI survey showed that 59 per cent of pork consumption occurred at restaurants, which is up about two percentage points in just 13 months. This growing trend is expected to propel imports upward since foreign pork is widely used in the country’s restaurant sector.