The U.S. red meat industry has achieved outstanding export growth in recent years, enhancing profitability for all members of the supply chain. In 2014, both beef exports ($7.13 billion) and pork exports ($6.67 billion) shattered previous records for export value. Beef exports have steadily increased in value in each of the 11 years since global markets began to reopen after the first U.S. case of BSE. For pork, export value has increased in 15 of the past 20 years.
In 2015, several headwinds have made it difficult for the U.S. industry to maintain this positive trajectory. Severe congestion in the West Coast ports — the result of a prolonged labor impasse — impacted our first-quarter results. Unusually large supplies of European pork and Australian beef have poured into key Asian markets, buoyed by favorable exchange rates that make them very attractive to price-sensitive buyers. Key competitors have also achieved gains due to free trade agreements that reduced import duties on their beef and pork products.
These are all important factors affecting U.S. exports, but they are issues over which we have little or no control. The same cannot be said about one of the biggest obstacles U.S. exports currently face — lack of access to China.
China is one of only a handful of international markets that never reopened to U.S. beef following the 2003 BSE case. At that time, and for several years thereafter, China was not a large importer of beef. But that changed dramatically in 2012, when beef import demand in China surged due to strong economic growth and a sharp decline in domestic production. China now imports more beef every month than it did in an entire calendar year in 2011. In the first half of this year, imports totaled nearly $910 million — up 28% from a year ago.
While the U.S. industry remains on the sidelines, Australia, Uruguay, New Zealand, Argentina and Canada are all gaining a strong foothold in China. Being shut out of the Chinese market also affects the prices U.S. beef cuts command in other Asian destinations, as China has begun to exert significant influence on global beef trade. For the U.S. beef industry, the lost opportunity due to our lack of access to China is currently estimated at more than $100 per head.
Considering that we export to about 100 countries, all of which have determined that U.S. beef is safe, it would be easy to view China’s import conditions as overly strict. But a growing number of major beef producing and exporting countries are meeting China’s requirements, aware of the market’s potential global impact on beef demand. In mid-2014, for example, China began testing beef imports from Australia for hormone residues, citing a hormone ban that had been in place for more than a decade, but had only been sporadically enforced. Australia responded quickly, implementing a certification program to meet China’s requirements.
When Canada confirmed its most recent BSE case in February, the Canadian Food Inspection Agency voluntarily suspended export certificates to China and began consultations with its counterpart agencies in China to restore access. Trade resumed in early April. A similar situation just occurred in Argentina, where trade was suspended due to a finding of vesicular stomatitis (VS) in dairy cattle.
With regard to U.S. pork, the Chinese market is not entirely closed. The U.S. technically has access for a full range of pork and pork variety meat products (with the exception of processed products), and recently gained access for pork fat. But a significant percentage of U.S. pork production is ineligible to ship to China due to ractopamine use and other factors that conflict with China’s import requirements. This has made it very difficult to capitalize on significant growth opportunities in China that have emerged this year due to high domestic prices, and which are presently being captured by European suppliers.
China produces and consumes about half the world’s pork. And while it is largely self-sufficient in production, even a small fluctuation in China’s need for imported pork can shake up the global market. The U.S. industry has benefitted from these fluctuations in the past — especially in 2011 and 2012, when exports to China were very strong. But with the enforcement of its import requirements and only a small number of U.S. plants being eligible to serve China, we saw a major slowdown in the second half of last year. So far in 2015, exports are down nearly 50% from a year ago. In the meantime, EU export volume to China is more than one-third higher year-over-year.
Similar to the beef complex, China has no lack of suitors who want a piece of its imported pork market. In addition to the EU, Canada and Chile compete aggressively in China and Mexican pork is a recent entrant into the market. Ractopamine is not an issue for suppliers from the EU and Chile (where it is not approved for use), but other competitors are also undeterred by China’s demands. Canada, in fact, has created a ractopamine-free verification program that even includes segregation at the cold storage facility level. This is another instance in which exceptional opportunities for export growth carried the day.