Korea’s Sluggish Economy, High Domestic Supplies Slow Demand for Meat

by Joel Haggard, USMEF senior vice president, Asia Pacific region

Korea’s domestic livestock industry was devastated by foot-and-mouth disease (FMD) in the first half of last year, which contributed to record-high red meat imports in 2011. Beef and pork supplies are ample in mid-2012, according to recently released Korean agricultural statistics and USMEF surveys of the trade. A sluggish economy, high pork stocks, and slower U.S. beef sales following the April BSE finding suggest that Korea’s meat imports will maintain a slow pace through late autumn. For the first six months of the year, Korea imported 125,328 metric tons of beef from all suppliers, a 15 percent decline compared to the first half of last year. Pork imports were down 14 percent to 219,427 metric tons, according to customs clearance figures.

Several factors contributed to the slowdown in meat purchases. First, Korean hog producers rebuilt the nation’s herd much faster than anticipated. As of mid-July 2012, the Korea Rural Economic Institute (KREI) estimates that inventories of live hogs stand at 9.4 million head, just 5 percent lower than the pre-FMD herd size. Korea culled one-third of its herd last year, resulting in record pork imports of 487,145 metric tons and a record low pork self-sufficiency rate of 60 percent. The rapid rebound in hog production has surprised members of the trade, who continued to import heavily due to incentives offered by the Korean government. Since the FMD crisis in the early spring of 2011, the Korean government – in a series of periodic announcements – has provided duty-free access for 460,000 tons of imported pork. The most recent (June 26) announcement allows for the import of 50,000 metric tons of duty-free, chilled and frozen single-ribbed bellies through the end of the year.

“The announcement was surprising since all indicators point to sizeable European belly stocks and slow summer sales,” said Jihae Yang, USMEF Korea director. “In the past, tariff-free quotas were quickly snapped up by importers. But the most recently announced tranche is being met with much less enthusiasm.”

Duties on imported frozen pork bellies – currently 16.7 percent for the United States and 20.4 percent for the EU – will continue to move lower under the terms of the free trade agreements recently implemented between Korea and these two major trading partners. Chilean pork is subject to the lowest duty rate on frozen bellies at 4.8 percent.

Although it is difficult to estimate frozen imported pork stocks, wholesale prices have been drifting steadily lower all year. USMEF-Korea reports a 10 percent drop in prices for European wholesale belly prices for January-June 2012 to the current level of 5,000 won per kilogram – just under $2.00 per pound. This summer’s steady drop in Korean pork prices has increased pressure on the market. The current average carcass price of 3,600 won per kilogram (about $142/cwt) is 16 percent lower than in January.

Beef suppliers also face challenging times ahead. Korean analysts note that the domestic beef herd has grown beyond an “economically healthy” size to 2.5 million head, leading to lower producer returns and new government programs aimed at reducing the herd and promoting domestic beef consumption. In February, the government proposed culling 200,000 cows and heifers to reduce the breeding herd size to 1 million head by the end of 2013. In the meantime, lower domestic prices and a $24 million joint government and industry promotion program are providing consumers with greater incentives to purchase domestic beef. Additionally beef is feeling increased pressure from attractively priced domestic and imported pork.

Korea’s weak economy is also adding to these woes. Retail and foodservice operators are reporting significant declines in overall food purchasing activity. Large discount chains are reporting year-over-year declines in food sales of 7 percent, with some major retail operators seeing declines in total meat department sales revenue of 20 percent to 25 percent. Because of strong domestic beef promotions, some are reporting 40 percent declines in sales of imported beef. While the April announcement of the fourth U.S. BSE case caused only mild market reactions in other Asian countries, sales in Korea stalled.

“Retailers are struggling with their imported beef sales this summer,” said USMEF Retail Specialist Junil Park. “Although retailers that dropped U.S. beef immediately after BSE have now restocked the product, sales are slow.”

Through June, Korean import data show a 13 percent decline in U.S. beef imports (to 47,121 metric tons) compared to the first half of last year. Chilled U.S. imports of 4,667 tons represent a decline of only 3 percent, which is a small but positive sign of continued consumer interest in U.S. beef. Also encouraging is the U.S. share of the Korean beef market, which has steadily increased over the past three years: 32.5 percent in 2010, 37.5 percent in 2011 and 37.7 percent in the first half of 2012. Imports of Australian chilled beef in the first half of 2012 have declined 20 percent from last year’s pace.

“We are slowly but surely recapturing the grain-fed chilled beef market, and will continue to aggressively work with retailers and foodservice operators to feature U.S. beef,” Yang said.

This year’s USMEF marketing programs have been integrated under a “World Class Beef” theme, the second phase of a long-term campaign to build trust among Korean consumers. Launched last December, the campaign features national television advertisements supported by U.S. beef promotions at retail and foodservice outlets. An important goal of the campaign has been to persuade smaller Korean restaurant operators to offer and feature U.S. beef. An April 2012 USMEF survey found an uptick in the percentage of restaurants using U.S. beef since this campaign began. USMEF is tracking consumer attitudes to U.S. beef through similar surveys, with results showing a slight improvement in consumer sentiment.

“The outlook for U.S. beef is still challenging, but promising overall,” said Yang.

Rapidly rising U.S. grain prices constitute a new market dynamic, and one that is likely to create significant ripples in Korea and other Asian countries this fall. Korea, as well as Japan and Taiwan, relies mainly on U.S. corn and soybeans for its livestock and poultry industries. Rising feed costs could further pinch producer margins and increase prices for domestic beef and pork.