Growing Pork Trade Enhances the Significance of Quarantine and Disease Status

Kathleen Plowman

General Manager, Policy, Australian Pork Limited

Introduction

The power of pork

Australia's share in the global market

Pork's share in the domestic market

Shaping the industry

Maintaining competitiveness in a global market

Discrete barriers to efficiency

Responding to the challenges - strategic imperatives

Conclusion

References

Introduction

Prior to the easing of quarantine restrictions in 1990, the international competitiveness of the Australian pork industry was not critical to its profitability. The focus of the industry then was almost solely on the domestic market. But a few years ago all that changed and the industry stood on the brink of devastation. The combination of falling prices and changes in domestic quarantine in 1994-95 caused more than 1000 (23 per cent) producers to leave the industry with hundreds more leaving over 1997 and 1998, forcing a radical restructure and rethink by the industry of its future (Productivity Commission Pig and Pigmeat Industries1998) . The question was where to from here?

Today the picture is far different. The Australian pork industry now competes in a global market and is influenced by world trends that influence supply and demand with profitability determined by the relationship of input costs to pricing. The Australian pork industry is unlikely to be competitive in price based commodity markets; it has proved competitive in growing niche markets based on its freedom from disease. It is Australia's unique and unparalleled health quarantine health status that underpins the future of the industry.

The recovery and continuing growth of the Australian pork industry, as witnessed by the near record prices and profits in the last 18 to 24 months, has been due as much to good fortune as to good management. The challenge for the Australian pork industry will be to continue to increase both its export and domestic markets in a reliable and cost-effective manner against strong competition from not only other pork producing nations but from other protein sources as well.

The power of pork

Globally, pork is the most widely consumed form of animal protein at around 40 per cent of world meat consumption (Federation of Danish Pig Producers and slaughter houses, 2001) . It is the world's most popular meat - followed by poultry, then beef and veal and then mutton and lamb.

Pork has seen solid growth in both total production and per capita consumption terms in the past ten years, creating an increased trade of pork within regions and between countries. International trade in pork has increased at the rate of six per cent per annum over the last five years and is projected to keep rising, with strong demand from China, Japan, Russia and Mexico. Nevertheless, trade in pork is still at a relatively low level at around four per cent of total production compared to 11 per cent for other meats (Rabobank International, 2001).

The growth in international trade is driven by:

• Trends in world population growth.
• Strong economic growth in developing and transition economies.
• Changes in dietary patterns, with demand for meat increasing in developing countries in line with increasing wealth.
• A differentiated pattern of production and consumption in developing countries, where increased production may not keep pace with increased demand.
• Continuing trade liberalisation.

This growth is further reinforced by the fact that international trade remains the lowest risk cross border strategy compared to foreign direct investment which requires more extensive capital and human resource requirements (Rabobank International 2001).

Australia's share in the global market

Producing only 0.4 per cent of world pork production and accounting for only 1.4 per cent of world exports, Australia is close to being the "runt of the litter" in the global pork industry.

Figure 1: Australian production as a Portion of World Production (2000)

Source: (Macarthur Agribusiness 2001).

Figure 2: Australian Exports as a Proportion of World Exports (2000)

Source: (Macarthur Agribusiness 2001) .

In trade terms, the industry is dominated by the European Union (notably Denmark and the Netherlands), Canada and the USA, while in production terms, China is a clear leader against the USA, the EU, Canada, Poland and Russia. Leading pork-importing countries are Japan, Russia, USA, Eastern Europe, China and South Korea.

Table 1: World pig meat production - 2001 (Forecasts)

Source: USDA, as cited in Dankeslagterier Statistics 2000

To meet the challenges of the changing business environment, Australian producers have looked to invest in and applied leading global technologies, gain economies of scale and scope to vertically integrate. This has seen the number of farms reduced from 20,000 to less than 3,000 within a ten year period and yet the average herd size has increased six fold to 115 sows accompanied by a 30 per cent increase in slaughter weight to 72 kilograms. The industry now has 300,000 sows, 15 per cent less than in 1981, but produces five million pigs per year, a 20 per cent increase. The gross value of pig production in 1998-99 was only $690m compared to $792m in 1999-00 and forecast of $855m in 2000-01.

While modern technology, genetics and production lines and the processes yielding lower costs are quickly copied, there is little chance that the Australian pork industry can ever match the Canadians, the Danes or the US in export volume or on price.

Pork's share in the domestic market

Although prices have risen considerably in the domestic market in the last two years, overall consumption compared to other meat competition has remained relatively static. The trend in the consumption of beef and lamb has continued to decline, while poultry has made the fastest gains in its share of Australian stomachs in recent years.

Table 2: Australian meat market share (%)

Source: ABARE & APL

This static demand for pork reflects the relative size and maturity of the domestic market. Nevertheless there has been a fundamental change in the demand for pork based products reflecting increased consumption of fresh pork, processed bacon products in fast food and a decline in bacon consumption in the home. Demand for ham from supermarkets and butchers has fallen whilst use in convenience foods is static.

Shaping the industry

In developed markets where there are limited options for independent growth, consolidation in the domestic market has been the traditional way for producers to expand - and that is exactly the approach the Australian industry has taken in the past. But now the industry is building 'productive capacity rather than chas(ing) production increases just to reduce costs of production.' (APL Chairman, APL AGM 2001).

The Australian pork industry has seen a dramatic change in its market dynamics in recent years with a rapid expansion of its export trade while concurrently facing considerable import competition. The domestic market, while of critical importance to the sustainability of the industry, is mature and therefore offers limited growth opportunities. It is the export industries and value added industries that offer significant growth opportunities.

In the last four years the industry has moved to capture and build export markets. Since 1997 demand from overseas markets for Australian pork has increased substantially from just 1.9 per cent of Australian pork production to 14 per cent in 2001. Growth in farmed exports has been spectacular, increasing from $45m in 1998 to $107m in 1999, more than doubling to $221m in 2001. The industry is set to achieve 20 per cent exports by 2002.

Figure 3:

Figure 4

However, this rapid growth has not come without a price, albeit a positive one. The cumulative effect of growing export demand has reduced the supply available for the Australian domestic market, leading to a recovery in domestic prices over the last two years. The industry now finds itself in a position where the demand for Australian pork, particularly in export markets, is outstripping the capacity of the industry to supply. Whether these prices are sustainable in the near future will depend very much on:

• How quickly production can be increased.
• Competition from international competitors in the terms of import replacement.
• The industry's production growth relative to growth in export markets.

Australian pork producers and their associated processors will need to continue to respond to the export challenge by progressively increasing supply whilst ensuring that there is adequate domestic supply to counteract the aggressive marketing of major world pork exporters like Denmark and Canada who export $140m of pork into Australia annually. The level of imports and their price has had a significant impact in the past on Australian pig meat prices, particularly in 1992, 1997 and 1998.

Figure 5: Australian Pig Meat Prices

In its 2002 Outlook, ABARE forecast that prices in the pork industry would be less favorable towards the end of this year due to rising global production following the current level of higher prices. People in the industry, however, take a more positive view. The APL's production surveys confirm that Australian pig producers will be expanding their operations in the coming year, spurred on in part by high prices. They also indicate that this expansion is being aimed at specific markets.

Maintaining competitiveness in a global market

The Australian pork industry has been experiencing near record profits in the last two years. Most of the increased margin being enjoyed by Australian producers is from higher prices, at the expense of the domestic customers and processors. It is only natural that these businesses will attempt to reduce the cost of their inputs, leading to an increase of pork imports into Australia.

High prices also make the Australian domestic market attractive to our international competitors and there will be strong competition for both Australia's domestic and export markets from other countries. It is therefore vital that the Australian pork industry identifies and extends its current competitive advantages and/or removes its constraints to global competitiveness.

When compared to pork industries of the major producers and export competitors the Australian pork industry's key competitive advantages appear to be:

• Its relative freedom from diseases.
• Proximity to Asia and capability in exporting fresh chilled pork to those Asian markets.
• Research and innovation.
• Favorable exchange rate conditions.

The industry's weaknesses are:

• The small domestic population.
• Grain feed prices and security of supply.
• The need for further development of the processing industry.

Disease and grain supply prices are probably the biggest constraints to the pigmeat industry. Feed inputs account for about 60 per cent of the total cost of pig production (the single largest input cost) and during times of regional or national shortage it has the potential to significantly impact on the viability of the industry and its ability to compete internationally. Australian pork producers need feed grain security to ensure their capacity to satisfy export and domestic demand. APL is working closely with other intensive livestock industries through the Feed Grain Action Group to find effective and workable solutions to this critical issue.

Exotic and zoonotic disease will play a major role in determining where pork will be produced globally and market accessibility. As a result of geographical isolation and the application of sound quarantine procedures for imported livestock, genetic material and animal products, Australia remains free of the major epidemic diseases of livestock and many of the serious diseases of swine.

A high standard quarantine status and disease freedom enables Australian producers to produce pork differently than rivals. High health status provides a key competitive advantage in accessing and securing Asian markets, as well as preserving the domestic market. Thus disease prevention is a key priority for the industry. The APL currently spends about 50 per cent of its research and development budget on meeting consumer demands for safer, higher quality pork. There are strong incentives for Australia to prevent the introduction of diseases that affect either the cost of production or the desirability of the product produced.

Australia's proximity to Asia also enables the industry to concentrate on supplying Asia's preference for fresh (chilled) pork. Australia mostly exports fresh chilled (73 per cent), or frozen pig meat (21 per cent) but also exports preserved or processed pigment and offal. Fresh chilled pork is predominantly exported to Singapore and Japan. Although Australia currently supplies only 1 per cent of Japanese pig meat imports it has the capacity to significantly increase exports to this market. If Australia succeeds in just doubling this market it would have a major impact on the Australian pork industry and in turn be a significant factor to its further expansion.

Finally, the Australian pig industry is globally acknowledged as a leader in pig research and development. Producers have gained advantage from the research investments of APL and many of the technologies developed have been a world first and some (such as Pig Pulse and Auspig) remain exclusive to Australian producers The challenge is to continue to develop R&D programs that further enhance profitability, productivity and quality of the product.

Discrete barriers to efficiency

Although the Australian pork industry supply chain has undergone considerable structural change, the efficiencies that have been achieved overseas are yet to be fully realized here. While the processing infrastructure is no longer a constraint to industry growth in export markets, it is nevertheless less advanced and less progressive compared to competitors such as the USA.

For example, payment in the USA is based on a lean meat yield rather than the P2 payment grid system used in Australia (P2 measures the thickness of backfat and there are price penalties if backfat does not meet this specification). The P2 payment system tends, however, to lead to the redistribution of fat, and this can have international marketing implications since a carcass that appears lean (based on P2) may have unacceptable amounts of fat in other parts of the carcass. This also results in the genetic selection of animals in which improvement in lean content is more cosmetic than when based on lean meat yield.

While the industry continues to pay on the basis of P2, genetic selection programs will be determined by the correlation between P2 and growth rate. However, in developing its selection procedures and technologies, Australia must also consider that its future now rests on both the international and domestic market place and that the current approach may adversely effect its international competitiveness by potentially affecting cost and product quality.

This issue is further complicated by the concept of 'rind on' or 'rind off'. Australian small goods manufacturers (i.e. ham and bacon) still prefer to sell rind-on bacon rather than rindless rashers. Yet Australia is one of the few countries left in the world that has rind on bacon. In the US and the rest of the world bacon is from the belly and not from the loin.

P2 and 'rind-on' both exert significant influence on Australian pig carcass weights. At present the supply of bacon to the domestic market requires a lighter leaner pig (than some international markets such as Japan) and also requires the use of a choice cut, the loin area, to supply the domestic bacon market. Processors will not buy fatter pigs because they want to process products with the rind still on, and until Australian consumer perceptions in this area change, the purchasing power of processors are unlikely to affect significant change.

Consideration must also be given to the industry's export expansion plans. For if Australia producers are to continue to expand into Asian export markets (which demand sows and gilts) and take advantage of increased carcass weights, net profit is limited by the use of boars rather than barrows, as both growth rate and feed efficiency decline rapidly at heavier weights.

The issue of castration needs to be handled carefully because of the effect on P2 and pricing grids. Castration inevitably increases carcass fatness and therefore actively discourages producers from castrating males (in addition to increased cost of production and animal welfare concerns.) It is also part of an even wider industry debate concerning eating quality, boar taint and growth performance and the merits of castration versus immuno-castration versus single sex genetic selection technologies.

There has been considerable industry research conducted in the area of pork eating quality and as part of its 2001-04 strategic plan, the APL is reviewing the results of this program to identify strategic interventions and target further research.

Responding to the challenges - strategic imperatives

While Australian Pork Limited may not be a commercial trader in the pork industry, it is and will continue to provide significant influence in the market. The APL was formed as a unique organisation able to deliver strategic policy development, research and marketing services, and having the capacity to fully integrate all services and thereby focus on members. The APL is one of the first such organisations in agriculture and other industries (like the egg industry) are keen observers of the APL approach.

The APL's first strategic plan, released to industry in November 2001, focuses on industry growth and competitiveness through:

• export and domestic market development;
• fostering of networks and alliances within the industry;
• integrated approaches to quality assurance;
• technical and business systems innovations;
• improved information analysis and distribution; and
• enhanced industry leadership and human capital infrastructure.

The task of the industry's peak representative body is to understand the dynamics and forces affecting supply and demand in the Australian (and global) pig industry, so that pigmeat producing members can make appropriate business decisions in the short and longer-term.

Conclusion

Australia has a small but excellent pork industry, with great potential for continuing growth. Its future success rests on export and competition for Australia's domestic and export markets, but competition will be fierce.

Continued expansion is inextricably linked with the maintenance of Australia's quarantine status. Consumers worldwide are becoming increasingly concerned about food quality and safety. The importance of promoting and protecting Australia's 'clean green' image has never been greater. The pork industry and the nation can ill-afford to erode its most competitive advantage, namely the unique health status of Australian agriculture.

References

Australian Pork Corporation and the Pig Research and Development Corporation, Meo, H.M. and Cleary, G. eds. 2000, Australian Pig Industry Handbook - PigStats 99.

Australian Pork Corporation and the Pig Research and Development Corporation, Meo, H.M. and Cleary, G. eds. 2000, Australian Pig Industry Handbook - PigStats 99.

Australian Pork Limited. 2001, unpublished data.

Australian Pork Limited. 2001, Annual General Meeting.

Australian Pork Limited. 2001, Strategic Plan 2001-04 .

Campbell, R.G. 2001, 'Threat and Opportunities for the Australian Pork Industry - competing in the world arena', paper presented at the Pan Pacific Pork Expo, Brisbane, August, 2001.

Federation of Danish Pig Producers and Slaughterhouses. 2001, Statistics 2000, Federation of Danish Pig Producers and Slaughterhouses, Denmark.

Macarthur Agribusiness. 2001, Charter of Strategic Imperatives, AFFA, Canberra.

Pork Council of Australia. 2000, NCP Review: Wheat Marketing Act 1989 , Submission on the Wheat Marketing Act 1989, July 2000.

Productivity Commission. 1998, Pig and Pigmeat Industries , Productivity Commission, Canberra.

Rabobank International. 2001, Internationalizing Pork companies .

United States Department of Agriculture. 2001, 'Livestock and Poultry World. Markets and Trade', Foreign Agricultural Service Circular Series , DL&P 1-01.