LIVESTOCK AND POULTRY
World Markets and Trade
Foot-and-Mouth Disease Spreads Chaos in Pork Markets
The outbreak of foot-and-mouth disease among Taiwan's swine herd has created turmoil in world pork markets. This outbreak has devastated the Taiwanese industry and effectively eliminated Japan's largest, single source of imported pork.
Taiwan has long been a major player in the international pork market, ranking as the third largest pork exporter in the world during 1996, behind the United States and Denmark. Prior to 1997, Taiwan typically exported roughly 30 percent of its total production, of which over 95 percent was destined for Japan. Because production costs are high (feed must be imported), Taiwan was able to expand exports by keeping domestic prices high through tight restrictions on pork imports. This has, in turn, resulted in a booming black market in smuggled hogs and pork products, most originating in mainland China. Although Taiwan has seen its market share in Japan decline, the total quantity of exports has continued to grow, and Taiwan remained the largest single exporter of pork to Japan at the beginning of 1997.
Foot-and-mouth disease (FMD) is an extremely contagious virus that affects all cloven-hoofed animals. It is not known to affect humans. Numerous different strains exist, some of which are more virulent for some animals than for others. The disease is endemic to much of Africa, Asia and South America, as well as parts of Europe. The United States has not had an outbreak of FMD since 1929.
After an incubation period of 1-21 days, the disease produces lesions in the mouth and on the feet of infected animals, among other symptoms. Although the disease is infrequently fatal, it can result in enormous losses in productivity. This accounts for the considerable efforts undertaken by FMD-free countries to remain that way.
FMD is resistant to common disinfectants, and can persist for over a year in infected premises and up to 12 weeks on clothing or in feed. The virus can be carried on clothing, in uncooked meat from infected animals, dairy products from infected animals, and on the wind for distances of up to 100 kilometers. Birds can carry the disease in their digestive tracts and thus spread it to new locations. FMD is susceptible to changes in PH, sunlight, and heat. Cooking will destroy the virus in meat: freezing or pickling in brine however, may prove ineffective.
On March 20, 1997, everything changed. Taiwan's Council of Agriculture (COA), announced that an outbreak of foot-and-mouth disease had taken place on a farm in Hsinchu, south of Taipei. As a result, Taiwan placed a temporary ban on the export of all pork. By the time the outbreak was announced, cases were confirmed on 28 additional farms. Within a week of the announcement, nearly 150,000 cases were reported, affecting 717 farms. Testing has indicated that the same strain of virus is present in China, leading to speculation that it was carried in with piglets or pork brought into Taiwan from China.
The government responded to the disaster with a two part plan to control the spread: vaccinate herds that had not been infected, and destroy all hogs in infected herds. At the time however, Taiwan had only 40,000 doses of vaccine on hand to immunize a herd estimated at 10 million head. Plans to purchase additional vaccine from overseas were announced, but the effort was plagued with controversies over the type and source of vaccine purchased, and over the distribution of the vaccine. The disease continued to spread rapidly until late May, when the vaccinations began to take effect. Since early June, only a handful of new cases have been reported, the latest on July 16. Ultimately, nearly 4 million pigs in infected herds had to be destroyed.
Image: Taiwan FMD Outbreak: Spread of the Disease Was Rapid and Indiscriminate
The damage to Taiwan's pork industry has been substantial. Nearly one-third of the swine herd at the start of the outbreak has been destroyed. Consumer fears regarding FMD, combined with the loss of export markets initially caused domestic prices for pork to crash during the first weeks of the outbreak. In June, prices exceeded pre-FMD levels due to the shortages caused by the temporary closure of slaughter facilities. By August, weighed down by the news of an additional 2 million more hogs in the inventory than anticipated, prices dropped to NT$ 3,458/100 kgs. (U.S. $138/100 kgs), 15 - 20 percent below the cost of production.
Over the last two months, pig auction prices ranged from NT$ 2,000-2,500 ($65-85) per 100 kgs. In an effort to support hog prices in the months ahead, the government has introduced a sow and piglet cull project to reduce the industry's breeding capacity. Beginning November 1, farmers are required to bring two sows and five piglets for rendering with each truck load of fat pigs to the auction market. As compensation, the government will support the rendering and other costs. The project is targeted to increase the pig auction price to meet the cost of production.
The FMD outbreak will undoubtedly change Taiwan's hog industry. With low prices expected for the rest of 1997, some farmers, especially smaller operations, are expected to leave the industry. Those slaughter houses which exported to Japan are seeking to establish domestic marketing channels for their products, but are having some difficulty because Taiwanese tastes differ from those of the Japanese and 62 percent of Taiwan's pork is sold through wet markets. Some Taiwanese packers are reportedly pursuing investment opportunities in North America, as well as trying to develop a market for processed pork products for export. Russia, Vietnam and the Philippines are seen as potential markets for processed pork products.
The Taiwanese government is committed to rebuilding its hog industry, eradicating the disease, and reentering the export market. The blanket vaccination policy remains in effect and will remain in effect until at least a year passes without an outbreak. A second year without vaccination and without an outbreak would have to follow before Taiwan would be in a position to request disease-free status and resume exporting fresh, chilled or frozen pork. Simplifying Taiwan's FMD eradication effort is that the particular strain of FMD involved only affects swine. On the other hand, Taiwanese authorities must ensure all hog producers continue with the mandatory vaccination program at their own expense, not just those wishing to export.
The Taiwanese government is also undertaking a farmer education campaign to improve biosecurity measures on farms and enhancing border controls and quarantine measures. The farmer education effort is aided by Livestock Disease Control Centers (LDCC) established in every county.
The government on July 1 introduced guidelines for reintroducing pigs onto previously contaminated farms. These will be enforced by the LDCC which will ensure that contaminated facilities are properly sterilized before pigs are reintroduced. That said, there have been early reports that hogs were being reintroduced in some regions without proper approval.
The most important question with respect to reconstruction of the industry is how Taiwan will draw a balance between hog production and environmental concerns. Taiwan paid a stiff price in water quality for maintaining such a large pig herd on a small island. Prior to the outbreak, environmental interests were agitating in favor of reducing the hog industry to a level that would supply only domestic needs. Reduced slaughter and lower inventories resulting from the outbreak have reportedly resulted in an improvement in water quality of 30-70 percent in some regions. Thus, the FMD outbreak is viewed by many on Taiwan as an opportunity to permanently downsize the hog industry. Proposals under consideration by Taiwan's Environmental Protection Administration (EPA) call for reducing the hog density in the primary watershed areas on Taiwan. For example, one such proposal seeks to reduce the number of hogs in Pingyung province in the south to fewer than 850,000 head, compared to 2.7 million pre-FMD.
The ultimate balance between environmental versus economic pressures will in part depend on the coordination between the COA and EPA. While the EPA can introduce environmental legislation, only the COA with its nation-wide extension service can properly implement and enforce such measures at the farm level.
Effects on World Trade
Taiwan established itself as the single largest exporter to Japan in 1986. This followed dramatic growth in exports beginning in 1982 when Denmark experienced an isolated outbreak of foot-and-mouth disease. With Denmark largely absent from the Japanese market from 1983-1985, Taiwan was able to make rapid gains in market share. By 1996, Taiwan exported approximately 80,000 tons of fresh/chilled pork and 186,000 tons frozen pork, commanded a 42 percent market share, and supplied 15 percent of Japan's total pork needs.
Reaction in the Japanese market to the disease outbreak was initially dramatic with the wholesale price of domestic pork carcasses increasing from 419 yen/kg on March 19 to 624 yen/kg on March 24. Domestic pork prices have remained above pre-FMD levels, but the initial panic that gripped the market subsided within a month. Large stocks on hand, in excess of 255,000 tons at the beginning of 1997, allowed ham and sausage manufacturers to continue their production lines uninterrupted. Retailers were reportedly maintaining their prices, fearful pork consumption would decline in the wake of the news of Taiwan's FMD outbreak. Overall, pork consumption in Japan is estimated at 2.1 million tons this year, down one percent from 1996.
Japan's safeguard mechanism for pork forestalled any immediate fluctuations in Japanese imports. The most recent safeguard measure, raising the gateprice from 590 yen/100 kgs to 720 yen/100 kgs., went into effect in July of 1996 and was already having a depressing effect on imports. The safeguard was a particular deterrent to imports of frozen pork, as evident in the extreme fluctuations, from month to month, in Japanese imports since 1995. At the time of Taiwan's FMD outbreak on March 20, the safeguard had been in place for 9 months and would be until July 1, 1997.
Image: U.S. Pork Exports to Japan
The safeguard, in large part, explains why third country suppliers of pork to Japan have yet to see large volume gains in exports to Japan after Taiwan's FMD outbreak. The draconian effect of the safeguard on frozen pork imports has caused a dramatic rise in Japanese pork stocks since 1995 as a hedge against dramatic price swings. From 1994 to 1996, Japanese pork stocks grew 118 percent, and accounted for nearly 12 percent of Japan's total pork needs by the end of 1996.
The absence of Taiwan from the market, however, has altered the need for retaining such high stock levels. Prior to the FMD outbreak, triggering the safeguard was a foregone conclusion, but the absence of Taiwan makes that less of a threat for this year and possibly 1998. As a result, Japanese pork stocks have declined nearly 92,000 to 163,000 tons this year and are forecast to decline to 155,000 tons by the end of 1998.
The draw down in Japanese stocks has contributed to the 19 percent decline in Japanese pork imports forecast for 1997. On a volume basis, imports are expected to reach 728,000 tons this year compared with 933,000 tons in 1996. U.S. exports of frozen pork have declined sharply, down 45 percent through August. Danish and Canadian frozen pork exports are up 2 percent and down 9 percent, respectively. Overall, Japanese frozen pork imports are down 29 percent through August, but are expected to see a modest recovery in the fourth quarter of this year now that the safeguard is off and the gateprice is down to 570 yen/100 kgs.
Image: Vagaries of Safeguard Drive up Japanese Imports and Stocks
Japanese imports of fresh chilled pork are down 27 percent through August as other pork suppliers, such as the United States, have not been able to readily substitute for Taiwanese fresh pork. U.S. fresh chilled exports are up 5 percent, but the United States has not made major in-roads into Taiwan's share of the fresh chilled market. Constraining U.S. exports is the Japanese consumers lack of familiarity with U.S. pork, as well as the U.S. industry's inability to deliver pork to Japanese tastes and specifications.
Certainly U.S. exports are well positioned in the next few years to take advantage of the market opening created by Taiwan's absence. Plentiful supplies and competitive prices are part of the equation for success. In addition, producers and exporters who are able to provide the quality and product specifications demanded by Japanese consumers can potentially make permanent gains in market share and lifelong business partners. For example, the Japanese prefer pork with a deep pink color and denser texture. Well known is the preference among Japanese buyers for the pork belly to be cut at the first rib rather than the fifth as is custom in U.S. packing houses. Some of these adjustments require modifications in production and/or processing techniques, but they are among the important factors to be considered as the United States makes a play for the Japanese market.