News & Events | Challenges Ahead in China for U.S. Meat Exporters

Challenges Ahead in China for U.S. Meat Exporters

by Joel Haggard
USMEF Senior Vice President for the Asia Pacific Region

Credit tightening, market contraction on the horizon

A cooling economy, weakening consumer demand and a rebound of China’s domestic hog herd are likely to present challenges for U.S. red meat exporters in the coming year. As 2008 draws to a close, Chinese meat importers are attempting to stabilize a market racked by global volatility in the financial and commodity markets.

In simple terms, huge volumes of pork and poultry imported at high costs in the first quarter of the year have created a large market overhang in the fourth quarter, with replacement product available at much lower prices than those that prevailed earlier in the year. Overall, Greater China’s imported beef, pork and poultry market environment remains treacherous due to high stock levels, dampened market demand and reported liquidity crunches among buyers. Cold temperatures and the onset of the peak winter consumption period are helping to stabilize the near calamitous situation that many traders faced in early November, and traders talk of seeing “some light” given the product movements in recent weeks – especially imported pork. However, there remains trepidation about market demand after the late January lunar new year, when consumption undergoes a seasonal slump.

U.S. pork exports to China are also facing significant competition from lower-priced domestic product. China’s pork output in the first three quarters of the year is up almost 6 percent while hog inventories are up 6.6 percent, according to official statistics. But some small producers may have exited the industry earlier this fall when breakevens exceeded live hog prices, and China’s hog prices may have hit bottom. So far in December, both live hog and piglet prices have turned upward, reversing a general declining trend that has prevailed since spring highs were achieved in February. However, most analysts believe China’s sow herd expansion means more hogs will be brought to markets through the first half of next year, dampening the possibility of another spike in prices.

First export drop in 7 years

As China celebrates its 30-year anniversary of economic reforms, the country faces significant headwinds. China’s inflation cooled to the weakest pace in almost two years in November, a signal that growth is slowing and the economy is again facing the risk of deflation. In November, consumer prices rose 2.4 percent from a year earlier, down sharply from the 8.7 percent experienced earlier in the year. Even more worrisome has been an almost unprecedented decline in exports. In November, outgoing trade declined 2.2 percent from year-ago levels, the first drop in more than seven years. Other danger signs are appearing - such as rising unemployment and business inventories, as well as a decline in consumer spending.

In a bid to jump start the economy, the People’s Bank of China has aggressively slashed its benchmark one-year interest rate for loans and deposits by 1.08 percent - to 5.58 percent and 2.52 percent, respectively. Policy makers see the low inflation rate as a potential door-opener for further stimulating interest cuts. China has also re-instituted a series of export incentives, and put the brakes on the appreciation of its currency. In recent weeks, the yuan actually weakened slightly, the first such negative movement against the dollar since the commencement of its managed float in July 2005. Perhaps most significantly, China has unveiled a massive 4 trillion yuan ($586 billion) economic stimulus package to help boost domestic demand.

Discounted food to spur consumer spending in Hong Kong

A cold economic chill is also hitting Hong Kong. October retail sales in the city were worse than market expectations — slipping to their lowest point since January 2007 — as pessimistic consumers tightened their belts. With rising unemployment and the prospect of a further spike in job losses in the fourth quarter and into next year, the local government has pledged to introduce fiscal measures, such as increased capital expenditures, to stimulate the economy. These efforts are also reaching down to the foodservice industry. The Hong Kong Federation of Restaurants and Related Trades has taken the initiative to stimulate consumer spending through a $1 dish offer beginning in mid-December. The campaign will run for approximately six months, promising Hong Kongers that they can enjoy dishes of roast pork, a bowl of wonton noodles or a dish of steamed buns for just $1 HK (about 13 U.S. cents) during specified time periods daily.

Despite these efforts, 500 restaurants in the city may have to shut down in 2009, according to Michael Chan, chairman of Café de Coral Holdings, the biggest listed Chinese fast-food chain in the city. But it is worth noting that while many hotels and restaurants saw roughly 10 to 15 percent decline in business amid the economic downturn, Christmas bookings remain robust. It is also important to remember that the recent declines are being measured against the lofty receipts of last year and early this year. Operators also see a silver lining in the reduction in property rents resulting from the soft economy.

Macau also feels pinched by the global financial crisis, with a major Las Vegas operator announcing a halt to further work on a huge hotel development project on Macau’s main Cotai strip. Around 11,000 construction workers have been laid off in the wake of this project suspension, and staff reductions in other casinos and industries have also been reported. Aggravating Macau’s woes is a new China policy restricting the number of visits to the territory by mainlanders.

It is important to keep in mind that the weakening of this region’s economies in the fourth quarter come after an extraordinary trading year. The U.S. has exported a record volume of pork to China, providing a glimpse of the country’s potential to emerge as a major player in the global pork trade. While important to recognize the challenging environment we currently face in the region, USMEF remains committed to long-term growth in the market and will focus our efforts and resources accordingly.

New Opportunities and Upcoming USMEF Activities in Greater China

Hong Kong authorities recently approved the importation of U.S. beef hanging tender. Under USDA’s export verification program, approved U.S. plants can begin obtaining FSIS health certificates after Dec. 10.

Since the inauguration of the China Cook-ism Club in July 2007, USMEF has organized a number of national educational seminars to facilitate culinary exchanges and brainstorming, Innovative chef member Shenzhen Super Steakhouse has combined the designs of an Indian pizza oven with a Texas smoker pit, resulting in an innovative in-restaurant Texas hybrid smokehouse oven that has proven a hit in the Chinese steakhouse environment. His restaurant success has lured other restaurants to install similar Texas smokers, featuring fruit wood smoked steaks on their regular menus.

Current and upcoming USMEF activities in the region include:

Nov. 20 to Dec. 31 – U.S. pork barbecue festival in Harbin DingTai Group, Northeast China
Nov. 20 to Dec. 20 – U.S. pork promotion in YuXinFang hot-pot restaurant, Northeast China
December – Chuck eye roll menu promotion in Maxim’s fast food chain in Hong Kong
December – Boneless short ribs in-store tasting promotion in Wellcome Supermarket, Hong Kong
December – U.S. pork hot-pot promotion in Mykal, Harbin
December – Continued Christmas season U.S. beef and pork in-store tasting promotions in Hong Kong’s major retail chains
Dec. 18 – U.S. pork hot-pot seminar at FengShunWan hot-pot restaurant
January – Two-page advertorial in Yummy magazine articulating the successful stories of U.S. beef and pork in South China and the introduction of U.S. beef hot-pot
January and February – U.S. pork menu promotion in Steak Expert restaurant, featuring U.S. natural and Kurobuta pork