4 November 2008

11 minute read

Situation and Outlook

Total Korean imports of beef are forecast to increase by about six percent in 2009 despite increases in domestic production. Imports from Australia and other competitors are expected to decline, especially if there is no substantial disruption in U.S. beef imports in the coming year.

Production

Calf production is forecast to decline in 2009 due to the drop in calf prices, increased feed costs and farmers' anxiety over increased beef imports; however, government intervention will ensure that the decline is measured. Up until March 2008, farmers were still trying to capture the high calf prices through increased insemination rates, which is one reason 2008 total calf production is expected to be so high. The calf price began to drop after an agreement for a new import health protocol for U.S. beef was reached in April.

When calf prices begun to fall, the Korean government increased the calf target price from 1.55 million won (about $1,340) per head to 1.65 million won (about $1,430) per head of calf. Farmers are compensated up to 300,000 won ($260) per head when calf prices fall under the target price.

Another factor affecting calf production is the continual rise in feed prices. As live cattle prices drop and feed prices continue to rise, domestic beef cattle producers will face a loss in revenue.

According to a study conducted by the National Agricultural Cooperative Federation’s Research Institute, beef cattle farmers earned 1,459,000 won per head in 2007. However, by June 2008, they were loosing 977,000 won per head due to low cattle prices and high feed prices. Live steer prices have dropped 28.1 percent from 4,788,000 won per head in January to 3,442,000 won in August. Nevertheless, average retail prices had only dropped 16.9 percent from 30,680 won per kilogram to 25,490 won per kilogram during the same period. Such a large drop in live cattle prices compared to retail beef prices is mainly due to the farmer's lack of bargaining power. Middlemen use this as a negotiating tool to keep prices down.

The table above shows that compound feed production for beef cattle has continued to rise despite the high cost of feed. The table below shows that feed costs are not as significant for fattening beef cattle as for other livestock; however the cost of purchasing the calf represents a large percentage of the total cost (55.9%). Given that cow-calf operations are mostly smaller farms that can either sell off their calves to feedlots or feed them on their own farms, and that the calf price and the fully grown cattle prices run in parallel, calf prices are the main factor determining whether farmers will increase their calf production or not. Feed prices account for a smaller portion of the total production cost and are a minor factor in the decision making process.

With the continued drop in live cattle prices and uncertainty surrounding the future of the Hanwoo market, farmers have begun to slaughter animals that are less productive, such as those that are slower in gaining weight. This is reflected in the higher slaughter numbers expected for 2008 and 2009. The cow slaughter rate was 45.0 percent in 2007 and is expected to stabilize at around 44.2 percent for the 2008-2009 period.

Domestic Support

The Korean government established a loan program to help livestock farmers cope with increased feed costs which provides up to 1.5 trillion won (about $1.3 billion) to allow farmers to secure compound feed for their livestock through the end of 2008. The annual interest rate is 3 percent, but the government and the National Agricultural Cooperative Federation will respectively pay 1 percent of the interest and therefore, the farmers only have to pay 1 percent of the loan amount as interest. Cattle farmers have to pay back the loan on a 2-year installment basis after a one year of grace period. Swine and chicken farms have to pay back the loan on a 2-year installment basis. In addition to the loan program, the Korean government removed the duty for 29 ingredients used in producing compound feed (equal to a reduction in compound feed costs by 120 billion won, or approximately $104 million).

The government also extended the period for the exemption of the value added tax that was suppose to be imposed on compound feed up to 2011 (equal to a reduction in compound feed costs by 530 billion won, or approximately $460 million). In order to be more self sufficient in livestock feed, the government is increasing the cultivated land area for forage feed. They plan to increase the forage feed area from 164,000 hectare in 2007 to 370,000 hectare by 2012. If successful, it would reduce the reliance on compound feed from 6.6 million tons in 2008 to 4.3 million tons in 2012. It is expected that the use of domestically produced forage would increase from 3.92 million tons in 2008 to 5.33 million tons in 2012.

The cattle farmers are also shifting their efforts to producing higher grade beef cattle to compete against lower priced imported beef. The following table shows the trend towards higher graded cattle production.

The government is trying to improve the quality of Hanwoo beef by providing incentives for high quality carcasses. It will provide an incentive of 200,000 won (about $173) per head of Hanwoo steers that are 1++ grade or Dairy steers that are 1+ grade or higher. Farmers that produce Hanwoo steers that are 1+ grade or dairy steers that are 1 grade will receive an incentive of 100,000 won (about $87) per head.

Further, to maintain the higher quality of Hanwoo cattle, the government plans to introduce an incentive program in 2009 for Hanwoo cows that meet a certain standard (details not available yet) to increase their birth rate. The government will provide an incentive payment of 200,000 won (about $173) for the 5th~6th calf from eligible cows and 300,000 won (about $270) for the 7th calf and beyond. Currently only 25 percent of Hanwoo cows are giving birth to three or more calves.

In order to reduce the use of antibiotics in compound feed that are premixed during the production of compound feeds, Korea will gradually reduce the number from the current 25 types in 2008 to 18 in 2009 and 9 in 2011. Korea will still allow antibiotics to be used through other methods, such as injection.

Korean slaughter plants are under utilized. Therefore, the Korean government is trying to increase their business by increasing the percent of slaughter plants equipped with meat processing plants. The Korean governme nt plans to increase the percent of slaughter plants equipped with processing facilities from 30 percent in 2008 to 90 percent by 2012. In addition to this, there were 1,273 meat processing plants at the beginning of 2005.

Consumption

Consumers have begun to purchase U.S. beef, but mostly at small, independent butcher shops. Sales at these butcher shops are doing quite well, especially since they do not have competition from the large discount chain stores. There have not been any protests in front of butcher shops. Consumer groups that organize these protests may feel that the public would not be as enthusiastic to protest in front of small mom and pop type stores. In addition, there are too many of these smaller shops throughout the country to focus on any one of them.

Prior to December 2003, Koreans preferred beef over chicken. However, high beef prices caused by a lack of supply and consumers concern over BSE, consumption of beef has been replaced by poultry and pork.

Korean consumers are enormously concerned about country of origin labeling. There is a general feeling that imported products are not as good as domestic products, and because they are cheaper, it is believed that there is rampant mislabeling. The domestic cattle industry especially has been very vocal about country of origin labeling. They believe that consumers intending to purchase Hanwoo beef are being mislead by false labeling. Given the price difference, it is very likely that this is the case; however, during a recent two-month intensive crackdown that started in July 2008, only 315 out of 284,00 that were checked were found to have falsely labeled the country of origin of beef. The most common violation was to falsely label imported beef as Korean, but some restaurants labeled U.S. beef as Australian and some labeled locally produced beef produced from non-Korean cattle as Hanwoo. From October, the National Agricultural Products Quality Management Service will give 2 million Korean won in rewards to those who report violations.

The Korean government is expected to complete the beef traceability system by July 2009. During the first half of 2009, the government will complete ear tagging of all the cattle being raised in Korea and will prohibit the slaughtering of cattle that do not have ear tags from July 2009. It will also revise relevant laws to label the slaughter plant name on the package to enhance consumer confidence by the end of 2008.

The consumption of beef is largely divided into three segments. The retail market (30%), restaurants (60%), and food processing (10%).

Restaurant Sector

The restaurant sector accounts for the bulk of the beef consumption, however, they have been hesitant to sell U.S. beef due to concerns over potential protests. In addition, strict country-of-origin labeling (COOL) went into effect on June 13, 2008 for beef for all restaurants making it a requirement to put the country-of-origin on the menu. For some restaurants, it will be a burden to change their menus. Ultimately, the COOL requirement will be a positive factor in promoting the quality of U.S. beef.

Retail Sector

Although the retail market does not account for the major share of beef consumption, it does reflect consumers' preferences. In general, Korean consumers prefer grain feed beef which produce a high amount of marbling. U.S. beef has been selling in the retail market at smaller butchershops and stores. The large discount chain stores have not yet made the decision to sell U.S. beef. It is anticipated that once these stores make this decision the pace of imports will pick up and more chilled beef will be exported. Currently, almost all imports of U.S. beef have been frozen beef shipped via the sea. Korea is expected to import approximately 70,000 metric tons (carcass weight equivalent) of U.S. beef through the end of this year.

Retail prices have been declining; although the main reason for this decline is not increased imports, but rather increased domestic production. As can be seen from the statistics in table 5, increased imports were only a minor factor during the first half of 2008. Then again U.S. beef had not resumed until June 26, 2008. Undoubtedly, the influence of imports will become higher during the second half of 2008. In addition, the reaction of farmers when imports increase will also be a factor. For example, if farmers rush to sell their stock this may affect live Hanwoo prices.

As can be seen from Table 7 below, beef increases during the two main holidays, Chusok (Korean Thanksgiving) in September and Lunar New Year in January.

Trade

On June 26, 2008, Korea published as final its new import health requirements for U.S. beef and beef products. With the publication of these requirements, Korea began clearing deboned U.S. beef produced under the January 2006 requirements that was in the pipeline since the Korean market closed on October 5, 2007. The pipeline product, 5,300 metric tons of boneless beef that was stored in Korea and another 4,000 tons of boneless beef that was stored in the United States has finished clearing quarantine inspection.

Following agreement on July 10, 2008, on the export certification statements for new U.S. beef and beef products for Korea, the U.S. Department of Agriculture (USDA) listed 30 establishments as eligible to export beef and beef products to Korea. These establishments either provided USDA’s Agricultural Marketing Service (AMS) with a Declaration of Conforming Product (DOCP) stating that they produced only non-Canadian-origin cattle or submitted to and received approval from AMS for an Export Verification (EV) Program that ensured Canadianorigin cattle harvested for Korea were fed in the United States for 100 days.

According to the agreement with Korea, 90 days from the June 26 implementation of the new import health protocol, Korea will recognize the U.S. system as equivalent, and the authority to verify establishments as eligible to export U.S. beef and beef products to Korea reverts to USDA. USDA will list any newly approved establishments on the AMS “Official Listing of Eligible Suppliers to the USDA Bovine EV Programs” found on its website at: http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRD3105269.

Separate from the U.S.-Korea agreement, Korean beef importers and U.S. exporters reached a commercial understanding on June 20, 2008, that only U.S. beef and beef products from cattle less than 30 months of age will be shipped to Korea, as a transitional measure, to allow for improved Korean consumer confidence in U.S. beef. At the request of U.S. exporters, USDA has set up a voluntary Quality System Assessment (QSA) Program that will verify for Korean importers that beef from participating establishments is from cattle less than 30 months of age.

Although this program is wholly voluntary, the Korean government has informed USDA that it will reject any product arriving at Korean ports of entry that has not been certified as produced under the QSA Program for Korea. The list of participating establishments can also be found on the AMS website at: http://www.ams.usda.gov/AMSv1.0/getfile?dDocName=STELPRDC5070251.

Further Reading

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November 2008