AgDM newsletter article, February 1998

Opportunities for Iowa pork exports

Dermot HayesBy Dermot J. Hayes, Professor of Economics, 515.294.6185, dhayes@iastate.edu

The United States is well positioned to capture a large share of the expanding world pork market.  Iowa in particular is well placed to participate in this growing market.  Currently a disproportionately large share of pork exports come from Iowa (as much as 35 percent of total US exports originate in Iowa). 

Iowa's packing plants do not have a convenient domestic customer base as do plants located in more populous states.  Therefore, Iowa's packing plants are more open to international opportunities.  In addition, low feed costs coupled with high hog prices makes Iowa an attractive place for new production. This export-oriented hog production could allow the Iowa hog industry to expand by as much as 30 percent over the next 10 years.

Below are reasons why this magnitude of expansion is possible. This analysis overlooks the temporary problems caused by the Asian crisis. If these problems are not temporary, then the analysis will prove to have been excessively optimistic.

Transportation costs

Some foreign countries import Iowa’s grain and feed it to their own swine herds. Others import the pork directly from us. Some countries like Japan do both.

A key variable in determining which method is most profitable is the cost of transportation.  In other words, it depends on the cost of transporting feed grains versus the cost of transporting meat.

Pork exports could displace feed grain exports over time.

To show this, let’s calculate how many pounds of feed it takes to produce one pound of pork for export.  If we assume the following:

It costs about 14 cents to transport a pound of frozen pork from Iowa to Asian markets.  It costs about 16 cents to transport a pound of chilled product.

Japanese farmers pay about six cents more per pound of feed than Iowa farmers. This price differential includes land, river, and ocean transportation costs, as well as the profits retained by the middlemen who get the grain from Iowa to the Japanese producer.  If it takes 7.8 pounds of feed to produce a pound of pork for export, the cost of transporting the feed for one pound of boneless pork to Japan is 47 cents (6 cents x 7.8 lbs. feed).

So, if the pork is produced in Japan using Iowa feed, transportation costs are 47 cents for a pound of boneless pork.  However, if the pork is produced in Iowa, it only costs 14 to 16 cents to transport a pound of boneless pork to Japan.

Based on this analysis, all else being equal, pork exports should displace feed grain exports over time.

Competitive advantage in processing

An ISU study of international pork processing costs conducted by Professor Marvin Hayenga suggests that the U.S. pork processors have significantly lower costs than those of competing countries.  As shown in Table 1, specific comparisons suggest that U.S. per head slaughter costs are about half of those of Denmark or the Netherlands.

Table 1.  Processing Cost Comparisons                                        

Location

Cost / Hog

Best in U.S.

$16

Avg. in U.S.

20 to 25

Denmark

50

Holland

40

Taiwan

30

Competitive advantage in production

The results are similar for the cost of producing pork.  The estimated cost of producing pork in Iowa and several competing areas is shown in Table 2.  Costs range from the $30s in Iowa and western Canada to $70 in Taiwan.  Brazil has low production costs but the presence of foot and mouth disease will always restrict exports.  Argentina actually imports pork, partially because of financial conditions that have worked against the development of a livestock industry and the necessary infrastructure.

Table 2. Cost of Production Comparisons

Location

$ per cwt.

Iowa mega

$35

traditional Iowa

39

North Carolina mega

38

non-Iowa traditional

43

Argentina

44

Australia

47

Brazil

38

Canada Prairie

38

Canada East

42

China (feed only)

40

China (total)

57

Denmark

54

Mexico

58

Philippines

70

Poland

55

Taiwan

70

China, which is the world’s largest pork producer, has both backyard hog production and modern confinement units.  The output of the backyard production is of very poor quality and is not expected to expand.  The modern sector is hampered by poor feed conversion, disease problems, and expensive feed costs.

Trade agreement impacts

Much of the recent increase in U.S. pork exports is due to trade agreements.  As trade continues to be liberalized, countries that are well endowed with arable land can expect to export more. Countries that are well endowed with arable land and capital – as is the U.S. – can expect to export more pork. 

The U.S. and Canada have 5 percent of the world’s population but 17 percent of the arable land.  By contrast, China has 22 percent of the world’s people but only 7 percent of the arable land.  Further liberalization of the world’s trading rules could dramatically expand U.S. pork exports, particularly to China.

These past agreements – particularly NAFTA and GATT – are very important because they opened markets in Mexico, eastern Canada, Japan, and South Korea. The combined population of these countries is about the same as the U.S. Given our cost advantage in supplying these markets, it is possible to imagine a future where we would export as much pork as we consume domestically.

Food preferences

One of the big successes of the U.S. poultry industry was to recognize that consumers in China prefer feet and wing tips while those in Russia prefer dark meat. This has allowed the U.S. poultry industry to export about 30 percent of its production while at the same time reducing the cost of white meat sold in the U.S.

The same patterns are beginning to occur with U.S. pork exports. Variety meats are finding their way into China, sausage meat into Russia, shoulder meat into Mexico, and loins and tenderloins into Japan.

Food safety

As the international pork market expands, it will become more sensitive to the international use of sanitary barriers. Recent examples of scientifically-valid sanitary barriers are those imposed against the Netherlands (Swine Fever) and Taiwan (Foot and Mouth Disease).

The U.S. was a beneficiary of these problems and probably captured a $10/cwt. advantage. However, had the problems arisen in the U.S., we would have experienced a $10/cwt. decline.

 

|Ag Decision Maker Home Page|