Highlights

Despite high domestic cattle and beef prices, Post forecasts Korea's cattle calf crop to see its 3rd consecutive decline. Recent concern over high-end beef demand due to an anti-graft law have discouraged cattle producers from continuing the previous expansion trend. Slaughter and beef production are also seen down with imports up to fill the gap. On the other hand, Korea's swine heard will continue to grow as farmers take advantage of firm prices, at least in the medium term, and consumers take advantage of the relatively cheaper protein. Given this demand compared to domestic capacity, slightly higher imports are still expected.

Production

Post forecasts that continued producer uncertainty over future beef prices will continue to drive down herd size and calf production. While this downward trend seemed to temporarily halt as numbers increased 6 percent in the three months to June 2016, the trend is expected to reestablish itself for the rest of the year and in to 2017. Three factors play into this post forecast. First, semen sales fell 4 percent in the first seven months of this year compared to the same time period in 2015. Virtually all Hanwoo calves are produced via artificial insemination (AI). Second, the percentage of cow slaughter rose from 2015's 49 percent to 51 percent year to date. Finally, the trend of elderly farmer retirements has continue apace, translating into an 8 percent decline in the number of farms raising under 50 head by June 2016, compared to the same time period last year. Although exact figures are hard to find, Post estimates that a majority of feeder calves come from farms of this size. In an effort to boost efficiency in the sector, a government program directs incentives towards this category of farmers to encourage their withdrawal from the industry.

A major cause of producers' price uncertainty relates to the new anti-graft law that goes into effect on September 28, 2016. The impact of the anti-graft law on Hanwoo beef prices and consumption will be discussed further in the beef section. The demand sap has had a dampening effect on farmers increasing their herd size. Despite the current high cattle prices, farmers are very hesitant to expand their herd size given uncertainty of cattle prices when this law goes into effect.

Post sees Korea's calf crop in 2017 to be the third straight year of declines. As explained above, our 2017 forecast reflects decreased beef cow numbers and low semen sales during the March – July 2016 period. Dairy cow numbers have been gradually dropping as farmers liquidate low-performing dairy cows due to the oversupply in milk production in Korea. As the human birth rate of Korea, already one of the lowest in the OECD, continues to fall (hitting 1.24 children per married couple in 2015).

Farmers made a profit on all cattle slaughtered in July 2016. The major factors attributed to this increased profit rate are a higher live cattle price and increased consumer demand for leaner cuts. This trend is expected to continue into 2017 due to high carcass prices coming from lower slaughter numbers. But, as Hanwoo beef consumption decreases due to high price and the anti-graft law, farmers producing lower grade (Grade 2 and lower) are at risk of losing money again.

PS&D

Animal Numbers, Cattle

Animal Numbers, Cattle

Market Begin Year

Korea, Republic of

2015

2016

2017

Jan 2015

Jan 2016

Jan 2017

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Total Cattle Beg. Stks

3190

3190

3088

3088

0

3106

Dairy Cows Beg. Stocks

305

305

293

293

0

294

Beef Cows Beg. Stocks

1123

1123

1099

1099

0

1050

Production (Calf Crop)

914

914

917

890

0

850

Total Imports

0

0

0

0

0

0

Total Supply

4104

4104

4005

3978

0

3956

Total Exports

0

0

0

0

0

0

Cow Slaughter

490

490

467

437

0

425

Calf Slaughter

0

0

0

0

0

0

Other Slaughter

516

516

490

425

0

420

Total Slaughter

1006

1006

957

862

0

845

Loss

10

10

10

10

0

10

Ending Inventories

3088

3088

3038

3106

0

3101

Total Distribution

4104

4104

4005

3978

0

3956

Commodities

Meat, Beef and Veal

Production

Post forecasts that beef production is expected to continue to drop in 2017. Lower cattle inventory is resulting in lower slaughter numbers, resulting in a drop in beef production. The anti-graft law is causing farmers to reconsider plans to increase their herd size as they fear that Hanwoo beef wholesale prices will drop due to the law which will prohibit providing gifts to public servants and other social dignitaries that are worth over 50,000 won (about US$50). Total slaughter numbers during the first half of 2016 did not reach 426,000 head, which is 83 percent of the level during the same period in 2015 and 87 percent of the level during the second half of 2015. The number of cattle under 2 years old in June 2016 was 1.6 million head, compared to 1.5 million head in December 2015. In addition, this cattle cohort increased 11 percent in the three months from March to June 2016. Although on the upswing, this growth will not be sufficient to compensate for the declining trend in total slaughter numbers in 2016 and into 2017 as the sale of semen has not increased to enable an increase in total herd size. GS&J, a research institute, estimated that the number of cattle put up for slaughter will continue to go down until 2018, or even up to 2019.

Consumption

High domestic Hanwoo beef prices in 2016 coupled with low production resulted in reduced consumption of domestic beef. Increased beef imports with higher price competitiveness against Hanwoo beef made up for the shortage in domestic beef supply. The outlook for higher beef consumption the rest of 2016 and into 2017 is not bright due to the following: 1) the Hanwoo beef supply will continue to drop in accordance with the low Hanwoo cattle inventory; 2) Hanwoo prices will be higher as a result of the short supply; 3) less meat will be consumed due to the anti-graft law. The anti-graft law that will go into effect on September 28, 2016, sets limits for receiving meals at 30,000 won and gifts at 50,000 won. Maximum monetary donations for funerals and weddings are set at 100,000 won. The Ministry of Agriculture, food and rural Affairs conducted a survey on gift prices. None of the Hanwoo gift prices were under 50,000 won, which means that Hanwoo beef which was one of the most popular gift items, will be directly impacted by the Law. The following table shows the range of gift prices that consumers purchase to provide to contacts and family members.

Although the anti-graft law only applies when the recipient or spouse is a public official, press, teachers, etc., and does not apply to gifts for family members, the number of people affected by the ban is estimated at nearly 4 million. Consequently demand for Hanwoo beef gifts baskets is expected by KREI to drop by 30 percent.

On the other hand, the shortage of Hanwoo beef supplies will enhance the price competitiveness of imported U.S. beef. The average Hanwoo beef price jumped to 1.78 times higher than U.S. beef prices in 2016, compared to 1.33 times in 2015. The price gap of U.S. beef against Australian beef and Korea pork prices also shrunk, making U.S. beef prices more price competitive. Based on the USDA-ERS projection that U.S. live steer prices will drop from an average of $3.27/kilogram in 2015 to $2.76 per kilogram in 2016, and further to $2.60 per kilogram in 2017, the price competitiveness of U.S. beef is projected to increase in 2016 and onwards to 2017, encouraging increased consumption of U.S. beef.

Trade

The shortage in domestic beef production is expected to provide an opportunity for increased beef imports in 2016 and into 2017. Also, the increased price competitiveness of U.S. beef, coupled with lower duties coming from Free Trade Agreements, will further enhance the competitiveness of U.S. beef in 2016 as well as 2017. Consequently, Post is revising up its 2016 beef import estimate and forecasting 2017 imports marginally above this year's forecast. The consumer confidence level in U.S. beef has slowly but gradually increased, as is indicated by the market share of U.S. beef, which has gone up to 39.3 percent in 2016, compared to the market share of 36 percent in 2014 and 2015.

USMEF is now focusing its efforts on expanding the use of U.S. beef beyond grilled use to soup use in order to further increase the market share of U.S. beef. It is also aggressively introducing new cuts for BBQ use to increase the market size for U.S. beef. There were 24 restaurants participating in 2016 BBQ week that is sponsored by USMEF, an increase of three-folds over the number of restaurants participating in 2015. One of the largest discount stores in Korea has now begun to replace Australian beef with U.S. beef, reflecting the increase in consumer confidence in U.S. beef as well as the shortage in Australian beef caused by the drought. It is also introducing Angus steak cuts in TV shopping channels to increase the variety of beef sold through home shopping channels. It remains to be seen if the exchange rate of the Korean won against the U.S. dollar will depreciate further as this would have a dampening effect on U.S. beef demand.

PS&D

Meat, Beef and Veal

Meat, Beef and Veal

Market Begin Year

Korea, Republic of

2015

2016

2017

Jan 2015

Jan 2016

Jan 2017

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Slaughter (Reference)

1006

1006

957

862

0

845

Beginning Stocks

50

50

13

13

0

13

Production

323

323

308

278

0

272

Total Imports

414

414

455

500

0

510

Total Supply

787

787

776

791

0

795

Total Exports

6

0

5

0

0

0

Human Dom. Consumption

768

774

761

778

0

782

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

768

774

761

778

0

782

Ending Stocks

13

13

10

13

0

13

Total Distribution

787

787

776

791

0

795

Commodities

Animal Numbers, Swine

Production

The effect of the industry's voluntary effort to reduce sow numbers that began in the second half of 2013 has allowed for swine carcass prices to increase in 2014 and into 2016. As a result, sow numbers have continued to increase, marking the highest level in June 2016, since 2010. High sow numbers are expected to continue into 2017 as demand for pork continues to increase, due to high domestic beef prices. The amount of compound feed for swine that was sold during the first half of 2016 was 4.3 percent higher than the same period in 2015. The increased sale of swine feed was evenly spread for all ages, from piglets to porkers, and especially for sow feed which jumped by 27.3 percent. The fact that there have not been any major swine disease outbreaks since May 2015 has also contributed to the increased inventory. Korea did have FMD in 19 swine farms since the start of 2016. However, it did not spread massively due to the vaccination program and Korea's eradication program.

Farmers increased the size of their swine herd in 2016, taking advantage of swine carcass prices. Although there was some loss of sows during the record hot summer in 2016, pork demand was also down due to the BBQ demand-dampening record hot summer, the hottest since 1994. According to the Korea Animal Improvement Association, a total of 113,451 head of candidate sows were purchased by swine farms during the first seven months of 2016, compared to 98,543 head during the same period in 2015, a 15.1 percent increase. Among the candidate sows, 85,509 head were pure-bred and the remainder 27,942 head hybrid. All told, Post forecasts Korea's swine heard to be 4 percent larger by 2017, with a pig crop 2 percent over 2016. Given the 10-month lag between the time farmers begin to increase the size of their herd up to the point of slaughter, the increased inventory will have a dampening impact on swine carcass prices in 2017.

PS&D

Animal Numbers, Swine

Animal Numbers, Swine

Market Begin Year

Korea, Republic of

2015

2016

2017

Jan 2015

Jan 2016

Jan 2017

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Total Beginning Stocks

10090

10090

10187

10187

0

10600

Sow Beginning Stocks

937

937

958

958

0

980

Production (Pig Crop)

17600

17600

17995

18011

0

18400

Total Imports

2

2

2

2

0

2

Total Supply

27692

27692

28184

28200

0

29002

Total Exports

0

0

0

0

0

0

Sow Slaughter

0

0

0

0

0

0

Other Slaughter

15907

15907

16200

16100

0

16502

Total Slaughter

15907

15907

16200

16100

0

16502

Loss

1598

1598

1484

1500

0

1500

Ending Inventories

10187

10187

10500

10600

0

11000

Total Distribution

27692

27692

28184

28200

0

29002

Commodities:

Meat, Swine

Production

As total swine inventory continues to rise in 2016 and into 2017, total swine slaughter is projected to increase through 2017. Total 2016 slaughter is projected based on 6 months of actual slaughter and the number of hogs graded for slaughtering in July 2016. The estimate shows growth over 2015 but comes in slightly under USDA's official projection. Pork production is projected to increase further in 2017, due to increased swine inventory that results in a slaughter forecast 2 percent above Post's new 2016 estimate. Post's 2016 production estimate was revised down based on the revised slaughter number, though still 1 percent over our 2015 production statistic.

Consumption

The increased price competitiveness of Korean pork compared to other Hanwoo beef and other protein, coupled with increased supply, is projected to increase pork consumption by over 3 percent in 2016. This trend is expected to continue in 2017, as the beef supply becomes tighter and the overall economic environment declines, which will induce consumers to seek a lower priced protein sources. Although the ratio of Korean pork prices over chilled U.S. beef prices increased from 0.71 in 2015 to 0.77 in 2016, it is still price competitive as its price has come down while all other competing meat prices, other than U.S. chilled beef, have gone up in 2016. During the same period, lower grade Korean Hanwoo beef prices jumped from 1.25 times to 1.53 times over Korean pork. Price of chilled Australian beef over Korean pork prices also increased from 1.10 times to 1.13 times during the same period.

Trade

Post forecasts 2017 pork imports will edge higher, somewhat restrained by growing domestic production. Despite domestic production growth, imports will still be needed to fill the gap, due to relative price competitiveness in the protein complex, as highlighted above. Pork imports in 2016 are forecast to increase slightly based on the first 7 months of import data despite the increase in domestic production, as the EU will continue to push their oversupply of pork into Korea. USMEF is trying to diversify the type of pork exported to Korea, such as Home Meal Replacement (HMR) items made of beef and pork. It will also put effort into marketing in order to increase pork imports for processing use by providing technical support to Korean meat processing companies. This will allow Korean meat processors to use more U.S. pork in producing domestic processed meat products, such as sausages, etc. The following table shows that U.S. pork prices will continue to be price competitive against the EU pork price in 2016, largely due to lower FTA duties.

PS&D

Meat, Swine

Meat, Swine

Market Begin Year

Korea, Republic of

2015

2016

2017

Jan 2015

Jan 2016

Jan 2017

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Slaughter (Reference)

15907

15907

16200

16100

0

16502

Beginning Stocks

118

118

118

118

0

96

Production

1217

1217

1240

1232

0

1263

Total Imports

599

599

610

620

0

640

Total Supply

1934

1934

1968

1970

0

1999

Total Exports

3

1

3

1

0

2

Human Dom. Consumption

1813

1815

1870

1873

0

1900

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

1813

1815

1870

1873

0

1900

Ending Stocks

118

118

95

96

0

97

Total Distribution

1934

1934

1968

1970

0

1999