Assessing the Opportunities for U.S. Pork in China
David L. Ortega, Graduate Student and H. Holly Wang, Associate Professor
The emergence of China onto the world economic stage has many implications for U.S. hog producers. As China makes its transition from a developing economy to a developed one, the world will notice that 20% of its population is becoming wealthier, demanding more goods, and eating more high quality food. Pork, being the primary meat in Chinese diets, will face a demand surge, which will need to be met by increasing supply and an efficient supply-chain. Although U.S. pork exports to China have been stagnant, recent events and negotiations have made progress in an uncharted territory.
A New Super Power
Since its admission into the World Trade Organization in 2001, China has captured the world’s attention. With an increasing population, rapid urbanization, and rising incomes, China is making its case to become the world’s next economic superpower. China’s average gross domestic product (GDP) growth since 1990 is an astounding 9.82%; the U.S. 2.94%, and the European Union 2.10%. If China, the U.S, and Europe were to keep these average growth rates into the future, the Chinese economy will surpass the E.U. in approximately 14 years and the U.S. economy in about 24 years. Such high level of growth has boosted Chinese citizen’s income and standard of living tremendously.
Urban sprawl has been a hot topic within China. Farmland around large cities has been turned into condominium complexes, and many farmers have migrated to cities in search of new jobs and the prospect of a better life. Such a high degree of urbanization and growth combined with a decrease in agricultural land has posed a very simple but serious question for China: is China able to provide high quality food for its people with its limited land and water resources?
Based on the latest arable land and population data from the World Bank, China must feed 9.1 persons for each hectare of arable land, whereas the United States needs to feed only 1.7 persons. China is home to roughly 20% of the world’s people, but only possesses 7% of all arable land. In addition, with a population increase of approximately 10 million annually, equivalent to the entire population of Portugal, China’s current and future generations will demand food far beyond what their land can provide. With farmland facing rapid industrialization and farmers migrating to cities, China, on the brink of a Malthusian crisis (click here to view Figure 1), will have to look outside of its borders for food supply.
The Chinese Diet & Pork Demand
Pork has historically been the primary animal protein source in Chinese diets, and its consumption level has tripled between 1980 and 2003. Chinese consumers are earning higher incomes and shifting consumption away from grains and legumes toward meats and animal proteins (Figure 2), a variation of Bennett’s Law, which states that as incomes increase, the source of calories shifts from carbohydrates to animal proteins; a phenomenon observed in many developing countries. Chinese per capita income has increased over 759% between 1980 and 2006. During that same period, daily per capita consumption of cereals and starchy roots in China decreased 16%, while per capita meat consumption increased 274%. In 2003, the average Chinese citizen consumed approximately 35.3 kilograms of pork, compared to 12.0 kilograms in 1980. Today, per capita pork consumption is estimated to be much higher as pork continues to be the primary meat consumed in China.
There are several differences in the type of pork demanded by consumers in China and the U.S. Chinese consumers tend to place higher value on the less desirable U.S. cuts and discount the traditional U.S./European cuts. For example, internal organs (offal) sell at a premium compared to lean muscle meat in the same market. A second difference deals with the amount of external fat present on the meat. Chinese consumers prefer pork with a certain fat content as opposed to U.S./European consumers who are drawn to lean cuts. This fat content preference arises from the taste and texture found in Chinese cuisine, and is supported by the fact that the majority of Chinese pork comes from “backyard production,” which results in high external fat. During a May 2008 visit, we collected market prices for different pork cuts in supermarkets in Beijing and Shanghai, as well as local markets and a wholesale market in Beijing. These market prices show the relative high price of pig offal compared to the more traditional U.S. pork cuts, such as loin and ground pork. From the point of view of the American hog producer, overall Chinese pork demand is, for the most part, complementary to that of U.S. consumer demand. U.S. consumers prefer lean muscle meat, while Chinese consumers welcome fatty meat cuts, neck and back bones, ears, feet and tails.
Using historical data, projections can be made regarding pork and total meat consumption (click here to view Figure 2). From these predictions one can roughly project 2015 per capita pork consumption to be 48.4 kilograms. Using a predicted population figure for 2015 of 1.40 billion, projected total pork demand for human consumption for the year 2015 is estimated to be around 68 million metric tons. Compared to 2003, 45 million metric tons, this is over a 50% increase. These numbers raise another very interesting question: where will all this pork come from?
Chinese Pork Production & Supply
Chinese pork production grew rapidly after 1985 when the government removed state procurement quotas and price controls (click here to view Figure 3). Today, about 80% of pork raised in China comes from local backyard production (Wang et al., 1998). The average pork producing household grows between one and five hogs. This type of backyard farming is more prominent in western, non-coastal areas such as Sichuan Province, the largest pork producing region in China. Unlike the U.S. and Europe, the local backyard producer is a key player in the pork-processing sector, often cutting, processing, and selling their own pork. Because of a lack of refrigeration and poor transportation and distribution systems, many manufacturers focus solely on regional markets.
To keep up with surging demand, China has recently begun to implement the Western model of consolidating and industrializing livestock production. Dozens of large hog operations have emerged outside major cities, raising 1,000 + animals. Economic growth in China is driving the consolidation and commercialization of pork production. However, this rapid transition has posed serious obstacles to the industry. Confinement of hogs combined with low sanitation standards has provided suitable breeding grounds for disease.
In May, June, and July of 2008, Reuters, Bloomberg, and other reputable news organizations published articles revealing the damage caused by the spread of porcine reproductive and respiratory syndrome virus, more commonly known as PRRS or “blue ear pig disease.” This disease has created a huge dent on China’s pork production. As of early 2008, this virus was found in 25 of China’s 33 provinces and regions, generating widespread panic for Chinese hog producers. A New York Times article states that approx. 25 million pigs die every year in China due to the disease (The New York Times, 2007). Figure 3 shows a 10.8% decrease in pork production between 2005 and 2008, which most U.S. agricultural economists attribute it to the PRRS outbreak. Although this 6 million metric ton decrease does not appear significant given China’s massive production capability, it is equal to more than half of the United State’s 2008 pork supply. This epidemic raises serious concerns about the short-run pork supply in China. This shortage in the domestic market will have to be filled by either increased imports or reduced exports.
Although the Chinese government is trying hard to encourage more investments in hog production, it remains a challenge in the long-run for domestic pork supply to meet the rapidly increasing demand. This is due to the current high world feed costs and limited Chinese arable land which restricts domestic feed production. In the past, China has been cautious on importing food and feed grain (except for oilseeds), and it seems unlikely that China will import a lot of feed grain to support large-scale hog production.
U.S. Pork Exports to China
It goes without mentioning that the speed with which China begins to import U.S. pork depends on the politics and negotiations between the two countries. In the recent past, China has successfully prevented the importation of U.S. pork due to the use of Ractopamine (RAC), a feed additive that promotes lean meat production which is readily used in the U.S. Rising costs of animal feed, veterinary supplies, fuel and food inflation, are putting increasing pressure on the Chinese government to negotiate trade deals with the U.S and other countries. Last September, Smithfield Foods Inc., the world’s largest pork producer and processor based in Virginia, negotiated a first of its kind deal to sell 60 million pounds of pork to China. More recently on July 1st, 2008, COFCO (the Cereals, Oils and Food Corporation of China) agreed to buy 7 million shares, or 4.95% of Smithfield Foods Inc.’s stock, paving the way for a strategic alliance between the world’s largest pork processor and consumer.
In a May 2008 interview conducted by us, a COFCO market analyst provided a closer look at the COFCO-Smithfield relationship. COFCO operates under the Chinese Ministry of Commerce (MOC) and was authorized by the government to import pork from the U.S. for the first time in recent history. This market analyst made reference to a 1997 COFCO delegation visit to the U.S. headed by Vice Minister Gao Hucheng to begin talks on this issue. After further negotiation, a pork import agreement was reached that included wheat and soybeans, as compensation for the U.S. trade deficit with China.
Under the import contract, China requires that U.S. producers exporting pork to China withdraw the use of RAC three months before slaughter. The imported pork has to pass a 0% RAC standard test at Chinese ports. The Chinese government working with Smithfield Foods and Chinese inspectors in the U.S. helped assure that the pork raised in the U.S. met the import standards of the agreement. Although using RAC is prohibited during a large portion of the hog’s weight-gaining stage, the impact on cost is not necessarily negative given the whole carcasses are exported to Chinese markets, which welcome a higher fat content.
Recent trade data between the U.S. and China show a drastic increase in U.S. pork exports to China (click here to view Figure 4). January-July 2008 pork exports to mainland China were 152 thousand metric tons, a 3-fold increase from the previous year. More astonishing are the trade figures with Hong Kong, which show pork exports at 164 thousand metric tons for January-July 2008, a 9-fold increase over the same period in 2007. It is important to note that Hong Kong and mainland China pork markets are quite integrated because China has been the major pork supplier to Hong Kong. The PRRS outbreak in the mainland is the primary reason that Hong Kong increased its import from the U.S. and other countries (Silva, 2007). Hong Kong also serves as a transshipment point for pork going to mainland China. It is estimated that unofficial transshipments and smuggling of pork products into China through Hong Kong are seven times greater than official imports (Fuell et al., 1997). From January through July 2008, China shipments (including Hong Kong) made up 24% of all pork export from the U.S., second only to Japan (27%).
China’s recent pork price surge has contributed to the increase in U.S. pork exports to China. China’s average retail pork price for January-June 2008 was 21,021 RMB (US 3,047) per ton, a 63% increase over the same period the previous year. Many analysts believe that Chinese domestic pork prices will remain high through the end of 2008 because of rising feed costs, which accounts for 70% of total swine production costs in China (Zhang & Beckman, 2008).
Another factor contributing to the surge in pork exports to China is the decrease seen in China’s strategic pork reserves due to production shocks caused by the PRRS outbreak and the Sichuan earthquake, which destroyed 4-5 million hogs. These supply shocks have forced the government to increase their frozen meat reserves, which are composed mostly of U.S. pork, specifically from Smithfield, Inc. (Zhang & Beckman, 2008).
COFCO, having little experience in the slaughtering and processing of hogs, wants to play a larger role in the Chinese pork sector. Many economists see COFCO’s recent purchase of 7 million shares of Smithfield Foods as a strategic move that will shift Smithfield closer to a relatively untapped meat market.
Competition is anticipated in Chinese pork markets. First, domestic production is expected to recover a little from the PRRS outbreak, and recent high domestic pork prices are expected to fuel investments in hog production. The Chinese purchasing of Smithfield stocks could signal the beginning of U.S. technology adoption with regards to PRRS control. In addition, large companies such as COFCO and Smithfield have the potential to invest and directly mange large hog operations, smoothing out production over the next year or two. However, as discussed earlier, the feed and land constraints will prevent the domestic hog supply from growing at the same speed as demand.
Other world pork exporters such as Demark, Canada and Brazil may increase their market share in China. However, the weak U.S. dollar, and the newly established relationship between China and Smithfield will make U.S. pork more competitive relative to these countries.
The Chinese government’s trade protection policies will continue to encourage domestic production; however, China is expected to become more open to U.S. imports in an effort to balance trade. Alongside energy and technology, agricultural commodities are high on the list of consumption goods that China is willing to import. Different from basic food grains, which are more sensitive to food security issues, pork has not yet become a necessity. Just like China is importing soybeans for edible oil use, pork can become another commodity that China is willing to import.
Although weekly shipments of U.S. pork to China are still a long way away, China has more reasons than ever to speed up pork negotiations with the U.S. With decreasing farm land, a rising middle class, a dented pork supply and pork consumption at an all-time high with no signs of slowing down, the stage is set for the U.S. to become a strategic partner in the Chinese pork sector.
Literature and Data Referenced
Economic Research Service (ERS) of the United States Department of Agriculture (USDA), China Agricultural and Economic Data. Washington D.C., 2008. http://www.ers.usda.gov/Data/China/
Food and Agriculture Organization (FAO) of the United Nations, FAO STAT. Rome 2008. http://faostat.fao.org.
Foreign Agricultural Service (FAS) of the USDA, Trade Data. Washington D.C., 2008. http://www.fas.usda.gov/markettradedata.asp
Fuell, L., and Zhang, J. “China’s Pork, Beef and Mutton Imports.” Voluntary Attach Report, AGR No CH7020, USDA/Foreign Agricultural Service, Washington DC, 14 April 1997.
The New York Times. Virus Spreading alarm and Pig Disease in China. August 16th, 2007.
Silva, J.f. “Brazil Livestock and Products Annual Livestock Report 2007” GAIN Report, BR7628, USDA FAS, September 2007.
Wang, Fuller, Hayes, Halbrendt. “Chinese Consumer Demand for Animal Products and Implications for U.S. Pork and Poultry Exports.” Journal of Agricultural and Applied Economics, July 1998.
World Bank. World Development Indications. Washington D.C., 2008. http://www.worldbank.org/publications/wdi.
Zhang, J., and Beckman, C. “People’s Republic of China: Agricultural Situation: Livestock and Products 2008”. USDA FAS. Beijing, September 2008.
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