The December Hogs and Pigs Report: No Fireworks

The Quarterly Hogs and Pigs report, issued by USDA on December 28, 2005, (http://usda.mannlib.cornell.edu/reports/nassr/livestock/php-bb/) showed unexceptional first-half 2006 farrowing intentions and modest increases in December 1 breeding herd numbers. These two data series in particular have important implications for pork production this year. Producers reported that they intend to farrow 1 percent more sows in the first 6 months of 2006 than they did during the same period in 2005. With trend increases in pigs per litter and slightly higher slaughter weights, the U.S. pork sector is expected to produce more than 10 billion pounds of pork in the first half of 2006, and almost 11 billion pounds in the second half, for a record high total in 2006 of over 21 billion pounds, or 2.4 percent above 2005. Live equivalent 51-52 percent hog prices are expected to average between $44 and $47 in 2006, about 9 percent lower than last year, but above break-even prices for most U.S. producers.

Producers reported December 1 breeding herd inventories that were 1 percent greater than a year earlier, but unchanged compared with December 1, 2003. Modest increases in breeding herd numbers show continued restraint by producers toward expansion in the 23rd month of greater than breakeven prices, according to USDA’s Estimated Returns (http://www.ers.usda.gov/publications/ldp/). It is worth noting again that recent production increases have been achieved largely via higher litter rates–that result from investment in human, as well as productive capital–and heavier average slaughter weights, rather than by additions to breeding herd inventories alone.

U.S. Imports of Canadian Swine Are Expected To Increase This Year

Finishing imported feeder pigs is another way to increase U.S. pork production without building and populating new farrowing facilities. Over the past few years, the primary source of U.S. feeder pig imports has been Canada (see table). Last year, 2005 was the first year since the early 1990s when swine imports from Canada did not increase year-over year. In 2005, U.S. feeder pig finishers and packers imported just over 8 million head of swine, according to USDA’s Animal and Plant Health Inspection Service, a quantity 5 percent lower than 2004. Several factors likely contributed to lower swine imports last year, including temporary dumping penalties in place through March, disease problems in Québec, and slightly lower pig crops in major exporting Provinces.

This year, U.S. feeder pig finishers are expected to import 8.7 million animals, more than two-thirds of which are expected to be feeder pigs. Year-over-year increases are expected to occur in the middle quarters of 2006, and are expected to be largely attributable to dumping penalties and countervailing duties recently imposed by Canada on imports of U.S. corn. On December 15th the Canada Border Services Agency imposed provisional duties that amount to roughly $1.65 ($0.58 attributable to anti-dumping and $1.07 to countervailing duties) per bushel on U.S. corn. The duties will reportedly add between $16 and $17 to the per-head cost of feeding hogs in Canada. Everything else equal, the effects of the duties will be to reduce incentives to finish hogs in Eastern Canada, given that Canadian prices of hogs and pigs are effectively tied to U.S. hog prices.

Canadian Duties on U.S. Corn Will Likely Impact North American Pork Sector

A recent USDA/Foreign Agricultural Service (FAS) report titled Provisional Dumping and Countervailing Duties on U.S. Corn Imports (http://www.fas.usda.gov/gainfiles/ 200512/146131782.pdf) discusses the regional Canadian swine production impacts of the corn duties, along with long term implications for swine production in Canada, if the duties become permanent. The USDA live swine import forecast of 8.7 million head in 2006–6 percent more than in 2005–assumes that the full effects of the duties are not felt until well into the second quarter for a number of reasons. First, Canadian investigative bodies will continue their examination of the case well into April. The Canadian Border Services Agency is expected to make its final determination by March 15 with respect to whether or not U.S. corn is illegally subsidized and/or dumped into Canadian markets. By April 18th the Canadian International Trade Tribunal will determine whether Canadian corn growers were/are injured by imported U.S. corn.

It is doubtful that feeder pig producers will make significant changes in their business plans until the Canadian Government concludes its investigations. Second, it is also likely that any potential duty-induced shifts in flows of Canadian feeder pigs from Canada to the United States will be forestalled by adequate feed stocks in Eastern Canada. Ontario produced a large corn crop last year–8 percent higher than in 2004–and there is abundant anecdotal evidence that on-farm feed stocks are adequate, at least through the first quarter. Lastly, it is likely that existing production and marketing contract arrangements hinder any abrupt shifts in flows of Canadian hogs and feeder pigs. Three factors, then–ongoing Canadian Government investigations, adequate feed supplies in Eastern Canada, and existing marketing/production contract arrangements–will likely shift duty-induced changes in Canadian swine exports to the later quarters of 2006.

Reopening of Japan to U.S. Beef and Russian Ban on Brazilian Pork Affects 2006 Pork Exports

When all 2005 trade data are finalized, it is likely that the United States will rank as the second-largest pork exporter in the world, after the exporters of the European Union-25 (i.e., Denmark accounts for 70 percent of European pork exports to countries outside Europe). Moreover, in each month of 2005 for which data are available, U.S. pork exports routinely exceeded same-month 2004 totals by doubledigit percentages. So no two ways about it: in 2005 U.S. exporters shipped lots of pork, with Japan accounting for about 40 percent of exports, and Russia accounting for almost 4 percent. Thus, the reopening of Japan to North American beef products and Russia’s ban on red meat imports from major pork-producing Brazilian States are very important events. In 2006, U.S. exporters are expected to ship almost 2.8 billion pounds of pork to foreign markets, or 3.6 percent more than in 2005. This forecast takes into account the recent events in both Japan and Russia.

Since Japan closed its borders to U.S. beef in December 2003, its imports of pork increased significantly as some Japanese consumers substituted pork for beef in their diets. Now that Japan has reopened to U.S. beef, demand for imported pork is expected to slowly resume past trading dynamics. With increased quantities of beef available to them in 2006, Japanese consumers are likely to demand a bit less pork. By extension, Japanese demand for U.S. pork is expected to begin a gradual decline from levels achieved in 2005.

On December 10, 2004, the Government of Russia issued a decree that sets 2006- 2009 import volumes “eligible for the lower tariff in Russia’s tariff-rate quota regime” for beef, pork, and poultry. (http://www.fas.usda.gov/gainfiles/200512/146131752.pdf). The decree allows Russian buyers to import 476,100 metric tons (mt) of pork in 2006, at tariff rates of up to 15 percent of customs value, but no less than 0.25 euro per kilogram (kg). Imports of greater than 476,100 mt would bear a tariff rate of up to 60 percent of the customs value, but no less than 1 euro per kg. Imports are allocated between the European Union-25(240,500 mt, or, 50.5 percent of the total), the United States (54,800 mt, or, 11.5 percent of the total), Paraguay (1,000 mt), and “Other countries” (179,800 mt, or 37.7 percent of the total).

Russia made a similar allocation of its pork imports in 2005, and Brazil accounted for the lion’s share of the quantity earmarked to “Other countries”. The recent outbreak of foot and mouth disease (FMD) in major red meat producing States of Brazil, caused Russia to announce “a 1-year ban on all beef and pork products from Mato Grosso do Sul and Parana and a 6-month ban on six other nearby states.” (http://www.fas.usda.gov/gainfiles/200512/146176465.pdf)

The 2006 forecast for U.S. pork exports assumes that U.S. exporters will fill the U.S. allocation. With the bans on Brazilian pork, it is likely that Canada will export larger quantities of pork products to Russia this year, under the “Other countries” allocation. As has been seen in the past, increases in Canadian exports tend to create shortages of selected cuts/products on the domestic Canadian pork market. Thus, U.S. exports to Canada are expected to increase this year, in order to fill holes created by increased Canadian exports to Russia.

An Update on FMD in Brazil and a Look at the Pork Industry and Domestic Demand

Animal disease outbreaks and resulting trade restrictions have affected both the composition of Brazilian meats (beef, pork, and poultry) traded as well as the degree of the meat processing. As a result, the Brazilian meat industry is searching for new consumers both in external and domestic markets. Marketing campaigns initiated in 2002 and jointly financed by the meat packers, exporters, and the Brazilian Government seek to expand not only the overseas sales of meats, but also to increase domestic consumption of fresh beef and pork.

Trade Impacts of the 2005 FMD Outbreak: An Update

The outbreak of Foot-and-Mouth Disease (FMD) in the state of Mato Grosso do Sul (MGS) (confirmed in October 2005) and in the state of Paraná (confirmed in December 2005) led to reduced exports of Brazil’s beef, and to a lesser extent pork, during the last quarter of 2005 due to the bans imposed by major importers. Exports of Brazilian fresh/frozen red meat in December 2005 totaled 105,000 tons, 28 percent below the level reported in September. Exports of fresh/frozen meat during the last quarter of 2005 totaled 347,000 tons, 8 percent below quantities exported during the same period in 2004. Despite the volume loss in the last quarter, total fresh/frozen beef exports in 2005 reached a record 1.1 million tons (17 percent over the 2004 level), and fresh/frozen pork exports totaled 579,000 tons in 2005 (23 percent above the 2004 figure). Trade statistics also reflect changes in the composition of trade, with a slight increase of 3 percent in exports of processed meats during the last quarter in 2005 (table 1). The value of total meat exports in 2005 of US$8 billion is a 30-percent increase over a year earlier (Secretaria de Comércio Exterior, SECEX data).

Early in 2006, Brazil successfully convinced some major importing countries to regionalize bans imposed following the new FMD outbreak and re-open their markets to products from states not being affected by FMD. Major meat importers include Russia, which has halted all beef, pork, poultry, and dairy product imports from MGS and Paraná, although Russia re-opened imports from six other states that were initially banned. Ukraine, another important market, has also regionalized its ban to MGS and Paraná. The European Union-25 (EU-25), the largest importer of Brazilian beef, regionalized the ban on beef imports from MGS, Paraná, and also included the neighboring state of São Paulo.

The Brazilian Pork Industry

Pork production in Brazil has been expanding, driven by strong export market demand as substitution of pork for other sources of animal protein followed declines in global beef and poultry trade due to disease-related bans (BSE and FMD affecting beef and avian influenza (AI) affecting poultry). As a result, the Brazilian pork industry accounts now for 15 percent of the value of meat production in the country. In 2005, pork production in Brazil exceeded 2.7 million tons, and is forecast to increase by 4 percent in 2006 (FAS/USDA). Pork exports generated over US$1.1 billion or 14 percent of total meat export revenues in 2005 (Secretaria de Comércio Exterior, SECEX data).

Pork production occurs throughout the country (fig. 1). The Northern and Northeastern regions have, respectively, 7 percent and 20 percent of the swine herd, with smaller operations sparsely spread over 16 states in those regions. Over 17 percent of the swine herd remains in the Southeastern region, a result of the modernization of production technology in the state of Mato Grosso do Sul. Over the past 7 years, following the increase in corn and soy production and aided by state and local tax incentives, large-scale commercial production of swine in the Center-West region now accounts for 12 percent of the herd. However, the bulk of pork production is in the Southern region of the country, where the industry initially located three decades ago. Over 44 percent of the swine herd (14.6 million head of swine) is located in that region, which includes the important producing states of Santa Catarina, Paraná, and Rio Grande do Sul (RGS).

Santa Catarina is Brazil’s largest pork producing and exporting state, with 5.7 million head of swine (equivalent to 17 percent of Brazil’s swine herd), accounting for 46 percent of Brazilian pork exports (232,000 tons in 2004). Paraná is the second-largest pork producing state, with 4.6 million head of swine (over 13 percent of the country’s swine herd) and is the third-largest pork-exporting state in 2004, supplying 65,000 tons or 13 percent of Brazil’s pork exports. Rio Grande do Sul (RGS) is Brazil’s third-largest swine producing state with 4.6 million head of swine, or 13 percent of Brazil’s swine herd in 2004, but is the second-largest pork exporting state, accounting for 25 percent of pork exports or 127,000 tons in 2004 (ABIPECS – Brazilian Pork Packaging and Export Association).

Both domestic and foreign investments have led to a transformation of the pork industry over the past decade, resulting in a more concentrated and vertically integrated industry (although to a lesser extent than the integration of the Brazilian poultry industry). The pork packing sector includes 200 plants slaughtering 29.6 million head of swine in 2004 (FAS PS&D online). The 2004 slaughter represents an increase of over 21 percent since 2000, indicative of the significant growth of the pork sector in the past 5 years.

Pork utilization in Brazil is estimated at 70 percent for industrial/processing uses and 30 percent for fresh consumption. The most significant obstacle faced by the industry as it attempts to sell more pork domestically remains sanitary issues. Less than 60 percent of total slaughter is currently inspected and certified, with inspected meat going mostly to the export market (ABIPECS).

Brazil is dependent on Russia for most of its export sales. In 2005 (January- November) Russia accounted for 70 percent of the value of Brazilian pork exports (US$739 million). Other important markets during this period include Hong Kong (US$63 million), Ukraine (US$33 million), and Argentina (US$30 million).

Income Distribution and Purchasing Power

Disposable income determines food purchases, and increases in purchases of higher-value products, such as meats, will likely depend on increases in the purchasing power of Brazilian consumers. With a population of 170 million, Brazil is categorized by the World Bank as a lower-middle income country with per capita gross income of US$3,300 in 2004. However, poverty and hunger are still major problems: 46 million Brazilians are estimated to live on less than US$1 a day, located mostly in urban non-metropolitan areas (Instituto Cidadania).

Brazil’s average per capita calorie consumption has grown steadily over the last three decades at an annual rate of 0.7 percent; it reached 2,985 calories per day in 2004. Grains account for the largest share of daily caloric intake–about one-third– and wheat and rice are the most popular cereals. Meat consumption accounts for 11 percent of the diet and sugar consumption 19 percent.

Pork Consumption and Domestic Demand

Seventy-three percent of Brazil’s pork production–2 million tons–is consumed domestically in Brazil. That makes Brazil the sixth largest pork consumer market in the world after China (48.6 million tons), the EU-25 (19.3 million tons), the United States (8.6 million tons), Japan (2.5 million tons), and Russia (2.4 million tons).

Annual per capita consumption of pork meat in Brazil is estimated at about 24 pounds, a small figure compared with the consumption of pork in other countries. In the United States the per capita consumption of pork is 71 pounds, and in Europe it reaches 143 pounds. In Brazil, beef is the preferred meat, with per capita beef consumption at 79 pounds, followed closely by chicken meat at 75 pounds.

Consumption of poultry meat has experienced rapid growth in recent years compared with pork consumption. Beef consumption is stable (fig. 2). The rapid growth in poultry consumption is associated with lower retail prices for whole chickens compared with top quality (rump) and second-class (forequarter) cuts of beef. The Food Expenditures Survey for Brazil indicates that income increases led to higher consumption of higher quality meats, with lower levels of income associated with less expensive cuts. At income levels of R$3,000 (US$1,500) consumers are able to purchase more of the top quality beef cuts, while decreasing consumption of both poultry and pork meats (fig. 3).

Most of the pork consumed in Brazil is processed (70 percent) with the remainder being “fresh/and frozen” meat despite higher processed meat prices. Higher consumption of processed pork products occurs in the regions with higher disposable incomes: South, Southeast, and the Center-West regions (table 2). Due to a moderate increase in population, total demand for pork will likely continue to grow in Brazil. In addition, reductions in regional poverty levels will add to demand for pork, increasing per capita consumption slightly. However, to increase domestic per capita consumption of pork significantly, consumer perceptions regarding quality and safety of pork will have to be addressed.

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For more information view the full Livestock, Dairy and Poultry Outlook - January 2006 (pdf)

Source: Livestock, Dairy and Poultry Outlook - U.S. Department of Agriculture, Economic Research Service - January 2006