LIVESTOCK AND POULTRY
World Markets and Trade
March 1998

Weak Asian Economies to Reduce U.S. Livestock Product Exports in 1998

The economic slowdown and substantial currency devaluations reduce prospects for U.S. exports of red meat and hides and skins to Asia in 1998. The United States sends 57 percent of its livestock product exports to Asia, with shipments heavily concentrated in Japan and Korea. The economic conditions in these major markets will greatly influence trade in 1998.

A wave of currency devaluations, stock market plunges, and business failures swept through Southeast Asia and East Asia during the latter half of 1997 and into 1998, severely battering the economies of Indonesia, Malaysia, the Philippines, Thailand, and Korea. The Asian economies entered 1998 facing credit shortages, falling incomes, and rising inflation. As a result, U.S. livestock product exports--primarily beef, pork, and cattle hides--to the region will be under pressure in 1998 and will likely fall below last year.

Reduced demand for U.S. agricultural livestock products in Asia is the result of the economic slowdown which will reduce income and a change in the relative prices for imports due to significant depreciation of Asian currencies relative to the U.S. dollar. In addition, U.S. market share in livestock trade may decline as the U.S. dollar appreciates against the currencies of countries such as Australia, which compete with the United States in the Asian markets. The U.S. will also face increased competition from certain Asian countries such as Thailand and Korea, where large devaluations have boosted their competitiveness in the poultry and pork markets in Japan.

Asian Markets Crucial for U.S. Livestock Products

The United States exports 40 percent of its total agricultural exports to the Asian Pacific Rim markets. These Asian markets are even more important for U.S. livestock and product exports. In 1997, the United States exported more than $7.9 billion worth of livestock products to the world, of which 57 percent were shipped to the Asian markets.

In 1997, livestock and product exports were almost $4.5 billion to the Asian Pacific Rim. Of the total livestock product exports, $2.9 billion were red meats-- beef, pork, and variety meats--and $1.2 billion were hides and skins.

U.S. livestock product exports to Asia are highly concentrated in a few commodities--beef, beef offal, pork, and cattle hides--and in a few markets. The United States exports 50 percent of its beef and pork to Japan. Korea has been one of the top markets for U.S. beef in recent years and is the leading market for cattle hides.

In 1996, the Bovine Spongiform Encephalopathy (BSE) crisis in the European Union and the E. coli outbreak in Japan contributed to a slowdown in the growth of global meat trade. The lingering effects of food safety concerns began to dissipate in 1997 and the outlook for both consumption and trade was improving. Then the Asian financial crisis hit in the last half of 1997, once again threatening growth in exports.

Although all the Asian Pacific Rim countries have been suffering some level of financial difficulty, most of the impact on U.S. livestock products will be evidenced in Korea and Japan. In Japan, the weak value of the yen continues to make U.S. export products expensive. In addition, consumer confidence is particularly low because of fears of the effect of the financial crisis on Japan. Instead of providing a needed boost to U.S. exports in 1998 as other Asian markets falter, Japan is likely to import fewer livestock products than in 1997. The economic events in Japan and Korea in 1998 will determine the gains or losses for U.S. livestock product exports.

Crisis Starts in Southeast Asia

The Asian financial crisis began in July 1997 when Thailand's Central Bank decided to float the baht after nearly exhausting its foreign exchange reserves. Several businesses had defaulted on loans and the demand for U.S. dollars jumped as Thai companies exchanged baht for dollars to cover their outstanding loans to foreign banks, leading to a near exhaustion of Thailand's foreign reserves. Foreign investors pulled out of the markets, further driving the baht down. The Thai baht lost 20 percent of its value vis-a-vis the U.S. dollar in July 1997.

At the same time, foreign investors began looking at other Asian markets and saw some of the same weaknesses that were apparent in Thailand. Shortly thereafter, the currencies of Indonesia, Malaysia, and the Philippines were under siege.

During the 1990's, part of the region's economic growth was built on expanding debt, much of it short-term. Also, financial markets were not sufficiently regulated, resulting in large inefficient loans. This was particularly true in Korea where the government's industrial policy directed funds to preferred conglomerates which made risky investments.

In November the Korean won began to lose value against the U.S. dollar. By January 1998, Asian currencies had lost from 20 to nearly 80 percent of their value versus the dollar compared with a year earlier. The Indonesian rupiah was the most seriously weakened. The currencies of China and Hong Kong, which are pegged to U.S. dollar, have remained stable.

Another major result of the financial crisis has been a severe cutback in expected income growth as measured by gross domestic product (GDP). During 1994-96, GDP growth averaged almost 7 percent annually in Indonesia, Malaysia, the Philippines, and Thailand. The financial crisis reduced GDP growth in 1997, and in 1998, Indonesia and Thailand will likely experience recession, while GDP expectations for Malaysia and the Philippines are substantially reduced.

Korea's GDP grew at more than 8 percent per year during 1994-96. Growth in 1997 was likely reduced to less than 6 percent; in 1998, Korea is likely to move into a recession.

Since 1991, Japan's average GDP growth has remained around 1 percent. Japan has failed to stimulate its economy and the trend is expected to carry through 1998. In addition to the poor income outlook, the Japanese yen depreciated vis-a-vis the U.S. dollar in 1997. The average value of the yen in January 1998 was 10 percent less compared with a year earlier, and 20 percent less compared with 1996. Previously, the strong yen provided support for imports even as the Japanese economy remained sluggish. In 1998, the Japanese consumer can expect little-to-no income growth and relatively higher import prices because of the strengthening U.S. dollar.

Korea: A Rising Market Stumbles

In 1997, the United States exported $972 million worth of livestock products to Korea, the same as in 1996. Cattle hide exports totaled $467 million, 48 percent of total U.S. livestock product exports. Exports of beef totaled $292 million and pork was $26 million. Beef export volume jumped 27 percent to nearly 90,000 tons (product weight equivalent, PWE), approaching 1995's record 91,000 tons. Pork exports increased 9 percent to more than 9,400 tons.

However, the impact of Korea's financial crisis was very clear in the December export statistics. Usually December U.S. beef exports to Korea are slightly above the monthly average for the year. But in December 1997, beef exports dropped to about 3,900 tons (PWE), compared with a monthly average of 7,800 tons for the first 11 months of the year. Pork dropped to under 400 tons from an 11-month average of over 800 tons. Cattle hide exports plunged to 347,000 pieces, the lowest month of shipments since December 1984.

The impact of the disruptions in the Korean hide market was immediate. Forty percent of U.S. cattle hide exports are shipped to Korea, and when the credit crunch prevented Korean tanneries from importing U.S. hides, prices plunged. The weighted average price for U.S. cattle hides was nearly $84/cwt. at the end of November 1997, but by the end of January 1998, the price had sunk to $61/cwt. After USDA allocated $100 million in GSM-102 credit for cattle hide sales to Korea, U.S. prices began to recover. At the end of February, cattle hide prices were back up to about $73/cwt.

In 1997, U.S. exports of hides to Korea dropped 5 percent to 7.7 million pieces, and the United States is expected to export fewer hides there in 1998. According to USDA's Export Sales Report, through February 1998, whole cattle hide exports to Korea were 45 percent behind a year ago, but sales began to pick up with the announcement of GSM-102 credit guarantees. Other countries have begun to increase purchases of U.S. cattle hides to take advantage of low prices. Even though total U.S. cattle hide export volume may not suffer a large drop in 1998, the decline in value is likely to be substantial due to the Korean economic situation's influence on U.S. hide prices this year.

As part of its WTO agreement, Korea has guaranteed access for 187,000 tons of beef imports in 1998. Sixty percent of the commitment is allocated to nine super-buyer groups--private groups that are authorized to import beef. The remainder is purchased through government tenders in 1998. In 2001, Korea is committed to liberalizing the beef market and the government tender system will be terminated.

The domestic cattle sector in Korea has been highly subsidized and consumers pay a high price for domestic Hanwoo beef which makes imported beef an attractive product. But the 50-percent depreciation of the Korean won has made imported beef considerably more expensive in 1998. The United States exports high quality grain-fed beef and higher prices for this type of beef could hurt exports more than lower priced cuts from other sources.

Korea is obligated to meet its WTO beef import commitments in 1998, but the U.S. market share is expected to decline. The Australian dollar has not appreciated against the Korean won as much as the U.S. dollar. Moreover, the Australian dollar has depreciated against the U.S. dollar, which could make its product more competitive in 1998 relative to U.S. product.

However, recent Korean demand for U.S. beef has strengthened with the support of GSM-102 credits. USDA offered $100 million in GSM-102 credits for meat and horticultural products, of which $87 million was used for beef purchases. In 1997, U.S. beef exports totaled $292 million. GSM coverage in 1998 is equivalent to 30 percent of U.S. exports last year thus far. In the early part of 1998, GSM credit is providing support for beef exports that is needed until credit and exchange rates stabilize later in the year.

Korea liberalized its pork market in July 1997 and expectations were high that the United States would considerably increase its exports in the coming years. However, expectations for Korean imports are significantly lower in 1998 with the onset of the financial crisis. Korea has abundant supplies of pork and is looking to capitalize on its depreciated currency and expand its own exports in 1998. Korea is expected to become a net exporter of pork for the first time in 5 years.

U.S. pork exports to Korea reached $26 million in 1997, but are expected to decline in 1998. Korea used $13 million of GSM-102 credits for pork purchases in 1998, and significantly lower U.S. pork prices could lend further support to pork exports to Korea in 1998.

Japan Market Remains Flat

Japan is by far the largest and most important market for U.S. livestock products, with exports totaling $2.7 billion in 1997. Beef exports were $1.4 billion in 1997, more than half the value of all livestock product exports to Japan. The volume of U.S. beef exports increased 3 percent to 346,000 tons in 1997 after flattening in 1996 because of food safety concerns. A small decline is expected in 1998.

Continued economic sluggishness in Japan is forecast to cause this year's beef consumption and imports to remain at 1997 levels. The U.S. share of Japan's total imports is expected to slip a few percentage points as the weakened yen makes U.S. beef prices relatively more expensive this year. The Australian dollar has depreciated against the U.S. dollar which could increase the competitiveness of Australian beef.

Japan's beef purchases have been slow during the start of 1998. This weakened demand in Japan was reflected in lower U.S. boxed beef prices in the first 2 months of 1998. The margin between beef graded USDA Choice and USDA Select narrowed significantly in February 1998. This suggests weak demand in the export market, as Choice would be heavily moved in the export market.

U.S. pork exports to Japan dropped 9 percent in 1997 even though Taiwan's shipments were cut off after the outbreak of foot-and-mouth disease in March 1997. Japan boosted production, reduced consumption, and drew down domestic stocks instead of increasing imports.

Japan is expected to increase its pork imports in 1998. Abundant global supplies and exchange rate fluctuations will increase competition for market share in Japan. The strength of the U.S. dollar could favor imports from Canada, Denmark, and Korea. Nonetheless, the United States is expected to marginally increase pork exports to Japan in 1998. In 1998, U.S. hog prices are forecast to be sharply lower than in 1997 as U.S. production soars. Pork export prices will fall below last year's, lowering the value of U.S. exports while volume rises only slightly.

Other Asian Markets Have Less Influence on U.S. Exports in 1998

Indonesia, Malaysia, the Philippines, and Thailand do not account for a large share of U.S. livestock exports. U.S. livestock exports to Southeast Asia declined 7 percent to $157 million in 1997, a very small share of total exports to the Pacific Rim. However, they are markets that have expanded about 20 percent annually over the last 5 years--a level of growth that is expected to be virtually shut off in 1998. These countries are potential growth markets for future exports, but in the near term, the financial crisis in these countries has little direct effect on U.S. livestock exports.

Livestock exports to China/Hong Kong and Taiwan reached nearly $650 million in 1997. Taiwan is the third leading market for beef in Asia. China and Taiwan were leading markets for U.S. cattle hides in 1997, with exports of $104 million and $194 million. Hong Kong imported about $107 million worth of red meat in 1997. Assuming these currencies retain their strength and the economies remain stable, U.S. livestock exports are likely to continue their upward trend in 1998.

The gains in livestock product exports--especially meat--over the recent years has been linked to rising incomes. Just how much consumption and imports slow in 1998 will depend largely on where exchange rates settle and how countries make economic adjustments to manage the situation. But overall, the decline in meat and cattle hides exports to the region is expected to be a short-run phenomenon. As the countries in the region begin to recover from the shocks of the financial crisis or overcome anemic economic growth, U.S. livestock product exports will resume expanding.

Last modified: Tuesday, December 16, 2003