Global Pork Meat Trade and Customer Demands on Feed Supply
paper presented by
Dr Roger G Campbell
CEO
Pork CRC
PO Box 466 Willaston SA 5118
to the
2006 Australasian Milling Conference
28-30 March 2006
Organized by the organised by the Flour Millers Council of Australia and the Stockfeed Manufacturers of Australia
Introduction
The paper concentrates on the global production and trade in pig meat and how changes in production cost both globally and in Australia might impact on ingredient supply and prices in Australia. I have also attempted to identify constraints on and opportunities for the Australian pork industry to improve its competitiveness and how the latter might be assisted by feed suppliers.
Global pork production and trade in pig meat is not static and export opportunities are subject to fierce competition since they generally result in higher domestic prices and allow growth of the production component of the supply chain. The latter is particularly true for countries such as Brazil where domestic prices are inherently low, but production costs and currency advantages allow margins to be achieved in the export arena and exports help boost domestic prices by affecting supply. The developing economies also have more long term potential to increase domestic pork consumption, whereas in developed countries like the USA and the EU pork production is a mature industry and faces static domestic demand. Exports increase foreign income, add value to grains and help raise domestic price and profit.
Trends in production generally reflect profit margins and as such cost of production. It is in the latter area that Australia lags behind its international competitors and as such has become an export target. The latter is obvious from the changes in Australia’s export and import statistics over the last four to five years. These effects will continue to reshape the size and nature of the Australian pork industry. Nevertheless, the factors that need to be addressed are abundantly clear and it appears that global trade in pork will continue to grow so there will be export opportunities for Australia.
Global pork Production and Impacts on Grain Supply and Prices
Pork production and consumption has increased annually from 2001 to 2004 and is forecast to continue to expand to just over 95 million tons in 2006 (Figure 1).
Table 1 summarizes pork production throughout the world for 2004 and 2005. The Peoples Republic of China remains the largest producer of pork, but unlike the EU where production has remained static since 2000, production in China has increased some 20 per centduring the same time period and is predicted to continue to rise as the industry continues to move towards larger more integrated production businesses. The impact of this growth on world grain supply and price is more difficult to predict. China seems self sufficient in corn though growth of the pork and poultry industries will likely affect the world’s supply ofgrain and would be expected to result in higher prices for corn, soybeans and soybean meal.
Brazil is also undergoing growth in excess of 4 per cent annually due largely to increasing exports to the Soviet Union and continued low production costs. The cost of production for selected countries is shown in Euros in Table 2. Brazil is the lowest cost producer in the world. Further growth, however, might be constrained by the foot and mouth situation in Brazil and the strengthening local currency (Reale), though recent visits to Brazil suggest the larger integrated companies are in major expansion mode and are targeting exports to Japan and Europe.
Growth of the Brazilian pork industry will likely affect soybean exports and consequently the global price of protein supplements. The latter prediction, however, has to be balanced against the continued efficiency in grain production in the USA, Brazil, Canada and other major grain growing countries. Agronomic and genetic advances are made relatively quickly in the grain industry compared to the animal industries though changes in the latter are quite dramatic when viewed over the longer term. This is addressed later in the paper.
The USA has enjoyed two profitable years (2004 and 2005) in the pork industry and 2006 looks like another good year. Growth such as this generally results in expansion, but as yet there are no signs of this occurring. Productive efficiency based on weight sold per sow/year has, however, been increasing 3.5 per cent to 4.5 per cent per year for the last five years and the trend is expected to continue. The impact of these effects in the USA on the demand for grains is likely to remain largely unchanged. A similar situation exists for Canada where pork production has remained relatively static due to moratoriums on expansion, a strengthening dollar against the USA currency and various trade disputes between the USA and Canada.
The EU is the second biggest producer of pork after China, but production remains static and is unlikely to have any impact on the global grain supply situation. In addition, looking at the comparative costs of production of the different countries (Table 2), it is difficult to understand how the EU can be a major exporter of pork outside the EU and raises questions about export support programs. Nevertheless, the taxpayer supports much of European agricultural production (not necessarily unwillingly) and this situation is unlikely to change in the next five years.
Australia has a similar cost of production as the EU and this is the major reason Australia has changed from a net exporter of pork in 2000-2001 to a net importer of pork in 2005. Part of this change relates to the strengthening of the Australian dollar and weakening of the USA dollar during the same time period.
Australia, however, faces other challenges including relatively high grain prices (compared to our major competitors) and production inefficiencies associated with genetics, reproduction and animal health. Unless these factors are addressed the Australian pork industry is likely to decline in size with as many as 20 per cent of producers being forced to exit the industry because of cost of production. This will be accompanied by continued consolidation such that the decline in animal numbers might be considerably less than the decline in producers.
The Australian pork industry currently uses some 1.9 million tonne of feed annually. The number of producers is likely to fall by 10 to 15 per cent due to a period of reduced production and a decline in slaughter weights as the industry changes towards the production of lighter carcasses for the fresh meat trade and away from the heavier carcasses for the manufacturing and export trades.
Nevertheless, it would be incorrect to assume the industry will have to go through major contraction or that it is unsustainable. The Pork CRC was formed with the support of the Federal Government and industry to attempt to address the constraints faced by the Australian pork industry and programs are now in place to reduce feed costs and improve the efficiency of production. It should also be noted that the New Zealand pork industry has faced pork imports that exceed 30 per cent of consumption for years but the industry remains viable and very profitable. We will, however, have to think differently and Australian feed suppliers will play a major role in determining the destiny of their customers.
Figure 1 Global Pork Production and Consumption Forecast (million Tons)
Global Trade in Pork
World pork exports are expected to reach a record 4.6 million tons in 2005, due in part to disruptions to supplies of beef and poultry associated with BSE and avian influenza and substitution of pork in importing countries for these other meats. Growth of exports is also expected to increase to Mexico, but will be income driven.
The USA continues to benefit from strong demand and currency exchange advantages and is expected to account for 25 per cent of all pork exported in 2005. The latter represents some 1.0 million tonne of pork or 13 per cent of domestic production. The figure is predicted to reach 1.25 million tonne in 2006. Canada is also expected to exceed 1.0 million tonne in exports in 2005, but the figure is predicted to remain flat over the next two years.
Interestingly, Australia is listed as the sixth biggest exporter and eighth biggest importer of pork. Unfortunately, the former is predicted to fall and the latter to increase (Figure 2). The results in Figure 2 further highlight the dilemma faced by the Australian pork industry particularly as imports continue to shrink the domestic market for heavier weight carcasses. Unless the trends can be reversed there will be industry restructure and a tendency towards the production of lighter weight animals.
Both factors/changes will likely reduce the demand for feed by the industry.
Table 1 Pork production in selected countries (1,000 metric tons carcass weight equivalent)
Country / 2004 / 2005 (p)China / 47,016 / 58,900
European Union / 20,270 / 20,900
USA / 9,402 / 9,591
Brazil / 2,730 / 2,825
Canada / 1,960 / 1,975
Russian Federation / 1,785 / 1,900
Japan / 1,260 / 1,240
Mexico / 1,175 / 1,200
Philippines / 1,100 / 1,122
Korea, South / 1,050 / 1,010
Taiwan / 910 / 935
Australia / 420 / 400
Others / 1,125 / 1,169
Total / 90,678 / 95,167
P=provisional; Reference (1)
Table 2 Cost of production in different countries (Euros/kg live weight)
Country / CostBrazil / .99
Canada / 1.13
USA / 1.15
Poland / 1.18
Netherlands / 1.30
China / 1.35
Australia / 1.36
Reference (2)
Figure 2 Import and Exports of Pork (1,000 metric tons carcass weight equivalents) for Australia (provisional and predicted for 2005 and 2006 respectively)
Reference (1)
The major exporters and importers of pork are shown in Tables 3 and 4 respectively. Japan accounts for nearly 30 per cent of all pork imports followed by Russia Mexico and the USA. The EU remains the biggest exporter of pork though its share of global exports has declined from 48 per cent in 2000 to 29 per cent in 2005. The USA is the second largest exporter of pork with 23 per cent of the global market and is followed by Canada and Brazil. The biggest growth in exports over the last five years has been achieved by China, the USA and Brazil. The tables do not include countries such as Singapore or New Zealand, but both countries have been and should remain export targets for the Australian industry given we have transport and carcass quality attributes for these markets not enjoyed by our competitors and Australia enjoys the greatest share of imports into Singapore.
Changes in the export and import of pork will have little effect on the world’s demand for grain though where it is required it will undergo marginal changes. Australia’s role in the global arena, however, will be affected which in turn will affect local feed requirements for the industry. Without consistent improvement in the efficiency and cost of production and/or the development of higher value domestic and international products the Australian pork industry will likely decline. In the medium term Australia’s success in the export market and to some extent prices in Australia will be affected by currency exchange rate fluctuations and the disease situations in the major exporting countries. In the longer term we will have to devise strategies for capturing and keeping markets in Japan, Singapore, New Zealand and Korea and means of reducing cost of production to reduce imports of pork for manufacturing purposes.
Table 3 Major Pork Importing Countries (1,000 metric tons carcass weightequivalents)
Country / 2001 / 2002 / 2003 / 2004 / 2005 / 2006Japan / 1,068 / 1,162 / 1,133 / 1,302 / 1,243 / 1,235
Russia / 528 / 834 / 725 / 629 / 650 / 675
USA / 431 / 486 / 538 / 499 / 447 / 435
Mexico / 294 / 325 / 371 / 458 / 495 / 505
Korea / 123 / 155 / 153 / 220 / 300 / 351
Hong Kong / 260 / 275 / 302 / 332 / 250 / 270
Romania / 63 / 106 / 133 / 179 / 185 / 180
Canada / 91 / 91 / 91 / 105 / 135 / 155
Australia / 38 / 55 / 67 / 77 / 90 / 95
China / 123 / 188 / 194 / 92 / 70 / 50
Ukraine / 2 / 2 / 10 / 52 / 75 / 60
Other / 121 / 138 / 165 / 138 / 127 / 118
Total / 3,142 / 3,817 / 3,882 / 4,083 / 4,067 / 4,129
Table 4 Major pork exporting Countries (1,000 metric tons carcass equivalents)
Country / 2001 / 2002 / 2003 / 2004 / 2005 / 2006EU / 1,135 / 1,158 / 1,234 / 1,436 / 1,430 / 1,450
USA / 707 / 731 / 779 / 989 / 1,229 / 1,265
Canada / 728 / 864 / 975 / 972 / 1,075 / 1,100
Brazil / 337 / 590 / 603 / 621 / 745 / 725
China / 139 / 216 / 282 / 383 / 400 / 415
Mexico / 61 / 61 / 48 / 52 / 55 / 58
Australia / 67 / 78 / 74 / 59 / 55 / 58
Korea / 42 / 16 / 17 / 10 / 5 / 10
Ukraine / 2 / 1 / 12 / 8 / 6 / 10
Romania / 0 / 0 / 0 / 5 / 2 / 3
Russia / 12 / 11 / 15 / 17 / 1 / 1
Others / 3 / 2 / 0 / 0 / 0 / 0
Total / 3,233 / 3,728 / 4,039 / 4,552 / 5,003 / 5,100
Other factors Affecting Global Feed Requirements for Pork Production
Most of the developed pork industries have undergone considerable technical changes over time, which have resulted in less feed being required per pig produced despite marked increase in sale weight over the same time periods.
The latter is best illustrated from the changes in weight and whole herd feed efficiency, which have occurred over 20 years in the USA (Figure 3). While these results are for smaller to medium size herds in the USA, but clearly demonstrate that the amount of feed required to produce even heavy pigs has and will continue to fall due to technical advances.
In the USA, recent genetic improvements are likely to hasten this improvement and the technologies will be made available to the more rapidly developing industries in China and Brazil. Consequently, increasing pork production will likely require decreasingly less feed per kg of meat produced in the future, which will moderate the demand for more grain and associated changes in the prices of grains/feed. Plant breeders make even more rapid advances and with molecular tools now at their disposal you would forecast continued improvements in yields and nutrient availability in the future. These technical advances are the reason grain prices (and pork prices) have declined in real terms over the last 15-20 years. The same trends can be expected over the next 15-20 years. Australia has to ensure it is at the leading edge of these technologies if it is to compete in the global pork market in the future.
Figure 4 Changes in Live Weight (100LB) and Whole Herd Feed: Gain in the USA Pork Industry (JBS United 20 Year Records: JBS United Sheridan Indiana)
Producer Demands/Needs From Feed Suppliers and Future Opportunities
Australia is seriously disadvantaged in intensive animal agriculture by grain prices which are constantly $50-$60/metric ton higher than the USA, Canada or Brazil. Australian producers want/need cheaper feed and would gladly take this from feed miller’s margins. However, the solution to the problem is to look at reducing the use of grains in pig diets and/or identifying grains more suitable for the pig than industrial purposes and developing a genuine feed grain industry in Australia. We now have technologies for rapidly identifying the nutrient contents of grains and know that the DE of a grain can differ by as much as 3 MJ/kg. In the short term, implementing such technologies at the mill and formulating diets much more accurately than we do now will reduce feed costs and the variability in animal performance. Feed manufacturers should also actively encourage the growing of pig-based feed grains and encourage their suppliers to provide information on the DE and other nutrient levels of any grains purchased.
Feed manufacturers should understand the constraints within their customer’s businesses and strive to bring or advise on the technologies available to alleviate or overcome these. This approach could also be applied to the animal genetics being used, stocking density, reproduction and any other factor affecting the efficiency and cost of production. In many cases feed cost may not be the major factor affecting profit.
In the USA, the two largest “nutrition” companies both have research farms and as many as ten PhDs on staff to provide advice and support to clients and package technologies developed in house into their clients feeds. The objective of these strategies is to keep the client competitive and their sales volumes and margins as high as possible. There seems to be less of the latter occurring in Australia, due to costs of running R&D units and the lack and cost of good scientific staff. Nevertheless, the technical leaders within feed companies need to be actively involved in research in Australia and aware of developments internationally and be prepared to licence new technologies developed by others.
Consolidation of ownership in the USA pork industry has reduced the need for prepared diets or nutritional packs from feed millers and nutrition companies. However, a large proportion of the large integrated companies use toll milling and the use of nutritional packs is likely to occur as ownership of the Australian pork industry continues to consolidate. USA feed companies have also kept the business of integrated companies by offering feed formulation services and their trading desks to procure both soybean meal and corn for their customers.
The other opportunity for feed companies in a more consolidated pork industry is to develop products/technologies their customers/potential customers cannot do without. Pork producers at all levels of the industry remain fascinated by technology and will pay for it if it improves productivity and/or makes management easier.
In the USA, feed companies make most of their margins out of their pre-starter and starter diets and invest most of their research efforts into these areas of nutrition. Almost all producers in the USA purchase their pre-starter diets and a proportion of their starter diets/packs from feed companies. Based on feedback and submissions already received by and made to the Pork CRC, this would seem to be an area of need in the Australian industry and an opportunity for feed mills.
Conclusions
The information discussed in the paper shows that the Australian pork industry is not competitive in the global production arena. The lack of competitiveness has led to pork imports increasing, exports decreasing and a resultant decline in pork prices and profit. If the average cost of production in Australia follows a normal distribution you would predict that many producers to the right of the average might exit the industry. Just how many establishments and pigs this might represent is questionable, but there is likely to be a decline in the number of producers and pigs over the next 12 months.
Further changes in ownership and pig numbers will depend on how price is affected by any restructure of the industry and the demand by wholesalers and retailers for fresh pork. Restructuring and profitability will also be affected by changes in the cost of production and demand in the domestic and exports markets of our competitors since this will affect the amount and price of pork from exporting countries available for Australia. If nothing else changed (and it will) at current import levels (80,000 metric ton) pork production might be expected to decline 10-12 per cent and feed requirements by a similar amount (230,000 metric tons). Similarly, if carcass weight declines because of the shift from a mixed market (fresh pork and pork for manufacturing and export), there will be a concomitant decline in the feed requirements of the Australian pork industry. Reducing carcass weight from 75 to 66 kg would reduce feed requirements by 9 per cent or some 170,000 metric tons. The latter, however, would likely only apply to 15-20 per cent of pigs, so would likely only reduce feed requirements by a further 25,000 to 35,000 metric tons.