South Korea’s devastating foot-and-mouth disease (FMD) epidemic now shows signs of abating, but the impact of the outbreak on pork supply and demand is expected to be felt for years. With an estimated one-third of the country’s 9.9 million-head swine herd culled and a sharp drop in local pork supplies, the marketplace is struggling to find a new equilibrium.
Imports look to fill a large portion of the supply gap, but sharply higher prices may cause noticeable consumption shifts. In addition, Korean farmers are trying to evaluate longer-term industry competitiveness in the face of new free-trade agreements that will lower the cost of new imports from the United States and Europe. Despite the uncertainty, U.S. pork trade prospects look very favorable throughout the year.
As of mid-March, widespread vaccinations were slowing the FMD outbreak, while hog operators – aided by a number of government subsidies and new tax and investment incentives – are in the process of restocking farms with breeding stock.
The rapid destruction of so much of Korea’s herd is causing worldwide pork market ripples as the full implications of the epidemic become more apparent. In 2010, domestic pork accounted for almost 81% of total Korean consumption. Last year, imports of 290,000 metric tons (319,000 tons) of pork meat – excluding offal and fats – ranked Korea as the fifth-largest pork importer in the world.
Now, pork imports are expected to get much larger, but how much larger is open to debate. In recent years, annual pork consumption in Korea has inched upward to nearly 1 million tons. Mainstream estimates of 2011 pork production are in the range of 600,000 tons. If consumption holds at the 1-million-ton level, 2011 imports could surge to 400,000 tons, nearly 40% above actual 2010 imports.
All agree that it is too early to predict this full year’s trade numbers. The 43% growth of imports in January and February suggests that current predictions are plausible. Imports of U.S. pork are up sharply (247%). This suggests that under the scenario of the market trying to secure large volumes of product in a short time frame, U.S. pork exporters are likely to grow their share. The United States accounted for 26% of Korea’s pork imports last year, making it the largest single-country supplier. The EU-27 had a 37% market share.
Will FMD Curb Pork Consumption?
The FMD crisis has some consumers shying away from pork due to food safety concerns, according to recent surveys. An even bigger factor, however, is the potential impact of higher prices on consumption. Korean media are devoting heavy coverage to the current “food price crisis.”
After Estonia, Korea experienced the largest increase in staple food costs among all OECD (Organization for Economic Cooperation and Development) countries in December. In January, Korea registered the largest increase in food cost among OECD countries with an 11.6% jump. A small rice harvest, coupled with FMD and avian influenza outbreaks, saw the culling of 10 million head of livestock and poultry. The shortfalls have hit supermarket shoppers and restaurant operators hard during the first quarter 2011.
For example, hundreds of small, family-run pork barbecue restaurants have nearly doubled the price of a half-pound portion of sliced domestic fresh bellies from the United States – from $8 to the $14 range. In supermarkets, branded domestic pork bellies are selling as high as $15/lb., similar to prices for some cuts of domestic Hanwoo beef. Some analysts point to the surge in beef imports as proof that consumers may be dropping pork from their menus.
Korea’s January beef imports of nearly 28,000 tons were the largest monthly level since pre-bovine spongiform encephalopathy (BSE) 2003. U.S. beef exports to Korea through the week of March 3 were up 165%.
Poultry imports also have surged with January’s trade breaking an all-time, single-month record. Per capita poultry consumption also has seen the fastest growth over the past 10 years, but Koreans still consume half as much poultry as they do pork. By far, pork owns the largest share of Korea’s meat consumption – a trend that is expected to continue.
While encouraging hog farmers to repopulate barns, Korea has taken the unusual step of offering incentives to importers. The Korean government has announced two ranches of a tariff-free pork import quota scheme totaling 110,000 tons. Subscriptions to both programs are nearly complete. The programs’ aim is to stabilize soaring pork prices caused by the shortage of domestic pork supply. Accordingly, 50,000 metric tons (55,000 tons) of raw materials were allocated to meat processors to ensure adequate supplies for pork processing, and 60,000 metric tons (66,000 tons) were earmarked for the importation of frozen, single-ribbed bellies, which are used in restaurants and sold in smaller quantities in supermarkets at a steep discount compared to fresh, domestic bellies.
The tariff-free decision was made for the dual purpose of providing consumers relief from rising pork prices, as well as softening the impact on the domestic industry. Those with an optimistic view of Korean pork consumption feel that recent retail promotions of frozen European sliced bellies, priced as low as $2.50/lb., have provided welcome relief to Korean households facing overall food inflation while keeping consumers close to pork.
Belly-Heavy Market
Bellies, cut to European specifications, normally account for half of all Korean pork imports. They are purchased to supply summer pork barbecue in the foodservice sector. Although the United States is set to grow its share of all cuts in the Korean trade, the country’s belly-heavy pork import profile means U.S. pork will still likely account for less than half of total imports, even with an optimistic market share scenario.
During the first quarter, Korea’s strong pork buying helped drive up prices of certain U.S. pork items. However, traders are now taking a breather as the market attempts to adjust to the large amount of imports that have cleared quarantine inspection, not to mention product still in transit. Some expect another tranche of duty-free pork imports to be announced during the summer, but importers have turned notably cautious of possible domestic dumping of imports into the wholesale market as they try to stay cash-liquid.
More uncertainty surrounds the recovery of Korea’s pork industry. Pessimists in Korea believe that the FMD crisis will result in a permanent reduction in the nation’s hog herd – perhaps up to 2 million head under a new equilibrium level. Under this scenario, the domestic pork industry opts for lower numbers, realizing that United States and European Union (EU) free-trade agreements take frozen pork import duties to zero by 2016 and 2020, respectively. Optimists maintain that Korea will rebuild its herd to near the pre-FMD level, based on heavy government support of the recovery effort. Prices of feed remain a wild card in any projection, as Korea relies almost entirely on imported feedgrains for livestock production.
U.S. Meat Export Federation (USMEF) is actively positioning the U.S. pork industry as a reliable supplier of low-cost, high-quality pork products during the supply shortage. This month, USMEF is holding a pork showcase where five major U.S. pork suppliers are displaying a wide range of pork products and providing assurances of supply availability.
With the cooperation of some of Korea’s largest retail chains, USMEF is helping build year-round sales points for chilled U.S. pork. Meat processors who had relied entirely on domestic product in the past are being educated to understand and appreciate U.S. pork quality, safety and availability.
Korea’s FMD crisis, though tragic, comes at a time when the nation is set to embrace more free trade among a range of products and services, including pork. Even before the outbreak, USMEF’s strategy envisioned a much larger presence for U.S. pork in the Korean marketplace. These longer-term market development efforts will continue alongside current tactics to ensure U.S. pork exporters and producers effectively compete to provide Korea with the pork supplies it needs through the current production crisis and beyond.
Joel Haggard
Senior Vice President, Asia-Pacific and Jihae Yang,
Director, South Korea
U.S. Meat Export Federation
info@usmef.org
www.usmef.org.