World Pork Map Trade will continue to grow, become more complicated and experience more competition

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1 July 2018 World Pork Map 2018 World Pork Trade Is Becoming Increasingly Complex and Competitive RaboResearch Food & Agribusiness far.rabobank.com Jan Peter van Ferneij Senior Analyst Animal Protein Contents Trade will continue to grow, become more complicated and experience more competition 1 Pork exporters focus on Asia 2 Russia could grow exports in the coming years 3 Summary Major pork producers depend on exports for profitability 4 Conclusion: trade will continue to develop and competition will intensify 5 Rabobank's World Pork Map shows global pork production and consumption, and the extent of the largest pork trade flows around the world. Trade flows continue to change, both for exporting countries and destination countries, and the products being traded also continue to adapt to the changing demand. The largest exporters the EU, US, Canada, and Brazil are increasingly competing in the same markets. China has become the most important destination for pork and by-products. Other Asian destinations have also increased their demand for imports. These destinations are buying an ever broader range of products, from low-value products such as by-products to products with high added value. Russia has almost disappeared as an importing country since 2014, and in future could start competing in world markets as an exporter. Trade will continue to grow, become more complicated and experience more competition Global trade in pork amounted to 8.3m tonnes in 2017 and had a value of more than EUR 18bn. These volumes represent only 7.5 percent of global production in The four largest exporters (the EU, US, Canada, and Brazil) export 91 percent of these volumes, intra-eu trade excluded. Since 2010, world pork trade has increased by more than 37 percent, despite a slight decrease in 2017, which was due to reduced import demand from China. World trade is dominated by frozen products. In recent years, trade flows not only changed in volume terms, but the assortment of products and the quality criteria on offer also expanded. This has been in response to changing consumer habits, which vary from country to country, and because most buyers have been developing their own product specifications and product descriptions depending on what they need the imported raw materials for. To be successful, suppliers have to adapt to these increasingly complex customer requirements. Pig carcasses can be cut out to around 150 different products, depending on the processing company. To maximise the value of the whole animal, destinations for products have to be spread locally, nationally, and globally. When it comes to competition between companies, it is increasingly important to have sufficient and secure market access and markets, in order to respond to the specific customer preferences. Meat companies with a wide range of market access opportunities, including e-commerce, have a greater ability to obtain better prices. 1/6 RaboResearch Rabobank World Pork Map July 2018

2 quantities, to sort cuts with homogeneous quality, making it possible to quickly load containers. Pork exporters focus on Asia Flows to Asia have dominated world pork trade in recent years (see the World Pork Map 2018). After the loss of exports to Russia in 2014, North American and European exporters welcomed the additional Asian demand. In 2017, roughly 60 percent of their exported products went to East Asia, compared to 40 percent in Within East-Asia, China is the most significant importing country in terms of volume. Japan comes second in volume, although the value of the products to Japan exceeds that of China. China is importing an ever-wider range of products with more value Low-value meat products, such as trimmings and shoulders, have gradually started gaining market share in the Chinese market since The demand for high-quality products and products that are marketed on food safety grounds is also developing, especially in cities such as Beijing and Shanghai. Since 2010, volumes have more than doubled to reach a record volume of 2m tonnes carcass weight in 2016, amounting to a quarter of world trade (see Figure 1). Historically, China only imported variety meat, but this has now been reduced to half of total imports. In 2017, the EU supplied close to 60 percent of Chinese imports, and, of its member states, Germany and Spain have clearly taken the lead, with a respective 15 percent and 13 percent share of total trade. Canada and the US each have a share of around 12 percent of China s imports. Meat companies that do not have direct access to mainland China use traders in Hong Kong with access to the mainland market (11 percent of Chinese imports are routed in this way). Imports could fluctuate in the coming years, depending on national supply and the development of demand. Figure 1: China imports 26 percent of world trade, ,000 thousand tonnes cwe 6,000 4,000 2, China & Hong Kong Japan Mexico South Korea US Philippines Canada Australia Russia Taiwan Note: variety meats not included Source: Rabobank, USDA, 2018 Japan has three dominant suppliers Japan is an importer of high-quality products, which are mainly elaborated meat products. The US and Canada supply Japan with more than half of its imports. North American exporters are able to supply the Japanese market in part with fresh meat, while the EU depends on frozen 2/6 RaboResearch Rabobank World Pork Map July 2018

3 product flows. The EU has a 31 percent share of the Japanese market and Denmark is the main supplier, although volumes have declined over the last few years. In 2017, Spain benefited from Japan s 6 percent increase in imports, and grew its exports by 23 percent. Spanish exporters have a modern industry, access to large (and growing) volumes and are skilled at adapting to customer requirements. Japan is experiencing a cultural shift from fish consumption to more (pork) meat. Together with the slow decline in national production, this will lead to increasing imports in the coming years. South Korea will increase imports South Korean imports grew from 250,000 tonnes in 2010 to 900,000 tonnes in The US and Germany are its most important suppliers: together they account for 56 percent of total imports. The South Korean market is shifting towards higher-value products, such as bellies and deboned cuts, comparable to the Japanese demand. Local production has not been able to follow the growing demand, and as a result, more meat will have to be imported in the coming years. Smaller markets are also increasingly popular New destinations in Asia are coming up Asian destinations like the Philippines and Taiwan have increased imports to satisfy growing national consumption. These markets still offer plenty of opportunities for many exporters. Together with Singapore, these three markets imported close to 500,000 tonnes in 2017, compared to almost 300,000 tonnes in Australia and New Zealand are increasingly under attack from exporters Australia and New Zealand are increasingly being exposed to imports, through the competitive pricing that exporters can offer. As fresh pork is not allowed to be imported into Australia, imports are driven by the processing industry s requirements for raw materials. Together, these countries imported 220,000 tonnes in 2017, roughly 50,000 tonnes more than in The US and the EU are the main suppliers. The current negotiations for Free Trade Agreements (FTA) between the EU and Australia & New Zealand may increase market access for European exporters. South American countries are slowly starting imports North American exporters have invested in opening up pork markets in Central and South America. Trade volumes are still modest, but as purchasing power increases, demand for pork imports also rises. The main destinations for US exports are Colombia, Honduras, Guatemala, and Panama. African markets are growing but money is still missing African countries can potentially gain importance as pork importers, but this is highly dependent on the price of the products and the purchasing power of the importing country. Of the countries currently involved in pork trade, Côte d'ivoire and South Africa will continue increasing imports, and Angola could return to the volumes imported in Demand in the Democratic Republic of the Congo is high, but imports will only increase when prices match local markets. Russia could grow exports in the coming years In February 2014, a case of African swine fever (ASF) was detected in Poland, leading Russia to ban imports from the EU. For political reasons, trade with the US and Canada was suspended in the same year. Only Brazil has retained access to the Russian market since that time, although a discovery of ractopamine a banned substance in Russia in a Brazilian meat shipment in 3/6 RaboResearch Rabobank World Pork Map July 2018

4 December 2017 led to Russia issuing a temporary ban on Brazilian exports. It is possible that this trade will restart in In 2013, Russia imported more than 1m tonnes in total, making it the third-largest importer of pork meat globally, behind China and Japan, with the EU as the dominant supplier. Imports have since fallen to below 300,000 tonnes in 2017, almost entirely supplied by Brazil. The reduction in imports since 2014 has led to a lower supply of meat, and price rises in the Russian market. Russian companies have responded to these higher prices (and government incentives too) by making large investments in local production. Russia s strong production growth means it is now 94 percent self-sufficient in pork meat. Russia could join the ranks of export countries in the coming years. For the time being, this is hampered by the spread of ASF. However, in 2017, exported volumes already rose above 100,000 tonnes, to destinations like Ukraine, Kazakhstan, and Hong Kong. Major pork producers depend on exports for profitability Pork production is evolving differently around the world. The four main exporters the EU, the US, Canada, and Brazil are all growing their exportable surpluses, and are increasingly competing in the same markets. Each major producer is slowly taking steps to differentiate its exports. Companies are also trying to build closer relationships with their foreign customers. EU: stable production and declining consumption leave room for more exports The EU exported 2.9m tonnes of pork and by-products in 2017, with more than 75 percent going to Asia (see Figure 2). More than 40 percent of this volume consists of variety meats and fats, as there is no significant demand for these products within the EU. The other major export category is bone-in cuts, which account for more than 35 percent. Denmark was historically the most important European exporter, but in recent years, Germany and Spain have taken the lead. Within the EU, pork is traded fresh in most cases. All countries participate in intra-eu trade, with volumes reaching 8.8m tonnes in Live trade is particularly common for piglets, which are moved from the Netherlands to Germany and Belgium, and from Denmark to Germany. There has been a clear increase in Danish piglets being shipped to Poland, exceeding 6.2m piglets in Figure 2: The EU and the US account for 65 percent of global exports, ,000 thousand tonnes cwe 6,000 4,000 2, EU US Canada Brazil China & Hong Kong Note: top-five exporters at 2018 levels, 200,000 tonnes or higher, intra-eu trade excluded, variety meats excluded Source: Rabobank, USDA 4/6 RaboResearch Rabobank World Pork Map July 2018

5 The US has to diversify destinations Increasing production in the US makes the country increasingly dependent on exports. The country exported 2.6m tonnes in 2017, compared to 1.9m tonnes in A third of US exports go to Mexico, where it is possible to obtain better value for hams, a cut with lower demand in the domestic market. Japan is the next most important export destination. Due to the expansion of production, the US will have to expand its exports, especially if Mexican imports weaken. Canada will continue to increase exports Canada exports two-thirds of its pork production, close to 1.3m tonnes in More than 80 percent goes to four destinations: the US, China, Japan, and Mexico. Three-quarters of the export is meat, often value-added. The EU-Canada comprehensive economic and trade agreement (CETA) provides Canada with zero-tariff access to the EU. Volumes exported to the EU can gradually increase to 80,000 tonnes in years to come. Brazil will need new export destinations Brazilian production is focused on exports. National pork consumption averages less than 15 kilograms per person and is slowly increasing. Exports have depended on Russia, which represented one-third of total exports until December 2017, when the country banned imports from Brazil. Although trade could start up again in 2018, Brazil is trying to diversify its exports, focusing on Asia. For example, the South Korean market opened to Brazil in May 2018, and pork shipments are expected to start mid Conclusion: trade will continue to develop and competition will intensify Pork trade will certainly continue to rise in the future. The four main exporters (the EU, the US, Canada, and Brazil) are expected to increase volumes available for world markets. Russia could become a net exporter in the coming years. Imports to Asia will continue to increase. China's imports are expected to remain around the current level, but will be subject to fluctuations depending on local supply and demand dynamics. In several other Asian countries, declining production and increasing demand will lead to more imports. South American and African destinations will slowly grow imports in response to increasing demand. New FTAs and bilateral agreements can enable the further expansion of trade. Although they are currently insignificant in world trade flows, further processed products could potentially become a more important part of international trade. Competition in pork trade is expected to intensify. Competition between exporters will increase to obtain the best carcass value. More than in the past, maximising the value of all products will be a key to the profitability of companies. Exporters will have to be present in a larger number of markets in order to guarantee sales and respond to changing consumer behaviour. Exporting companies will also have to respond to innovative, modern ways of marketing and transport. Meanwhile, importing countries are constantly trying to maintain pricing pressure by increasing the number of suppliers. Creating strong relationships and adapting products to customer needs can partly circumvent price competition or at least better control price volatility. In addition, pork trade will become more complex. Political issues, like the ongoing US-China trade dispute, and animal health problems (like PEDv and ASF) will continue to affect trade. If an exporter has to deal with animal diseases, for example, importers will look to other suppliers. In turn, companies that have implemented regional diversification would then be able to approach the market from a different production area. 5/6 RaboResearch Rabobank World Pork Map July 2018

6 Imprint RaboResearch Food & Agribusiness far.rabobank.com Jan Peter van Ferneij Senior Analyst Animal Protein All rights reserved This document is meant exclusively for you and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced, or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable; however, Rabobank does not guarantee the correctness or completeness of this document, and does not accept any liability in this respect. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas, et cetera contained in this document. This document does not constitute an offer, invitation, or recommendation. This document shall not form the basis of, or cannot be relied upon in connection with, any contract or commitment whatsoever. The information in this document is not intended, and may not be understood, as an advice (including, without limitation, an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, the Netherlands has exclusive jurisdiction to settle any dispute which may arise out of, or in connection with, this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of RaboResearch Food & Agribusiness. 6/6 RaboResearch Rabobank World Pork Map July 2018