Global Meat Trade is a Big Deal Getting Bigger

Dr. Thomas E. Elam [1]

If you ever doubted how important trade is just pause a minute, look around slowly wherever you are at this moment, and ask two simple questions:

1. How much of this stuff here did I make myself?
2. How much of this stuff here was made by somebody I personally know?

Without trade we would have to live like modern day Robinson Crusoes, making essentially everything we need. Being a jack-of-all-trades may be romantic, but it is not a very efficient way to produce goods and services. By trading we also become specialized, learning to do a few things very well. Specialization vastly increases our productivity, and productivity is the key that unlocks innovation and economic growth.

For the most part we take trade for granted. We are so immersed in it that we never pause to consider that we make nothing we use. We are totally dependent on trading with others for both the essentials and the luxuries of life. We have goods and services from all around the world at our fingertips, and never pause to ponder on just how it all got there.

One would think that if trade is so fundamental to economic life and progress that we would always welcome the opportunity for more. In many respects it is true that we welcome more trade. We never think twice about trading with a neighborhood store, someone in a town close by, or in the next state, or in recent times over the Internet. In principle it matters not who we trade with, it’s all the same. Yet when trade crosses national boundaries it is somehow different.

Consider that here the U.S. few people would care where the steak, pork chop, or chicken, they have for dinner tonight was raised. For the most part they assume it was produced on a U.S. farm. But tell someone that their pork or beef came from Canada or Mexico, or Australia, and it is somehow different. But more and more of the world’s, and our own, meat is passing over international borders before it is consumed. Increasing meat trade is not an isolated trend, but rather a part of an overall world economy that is becoming ever-more dependent on trade in goods and services.

International trade has been increasing faster than global GDP (GDP is itself the internal trade among the people of a country) for many decades. International trade in meat is also increasing rapidly, in both absolute terms and relative to total global meat production.

Figure 1[2]

Global Trade as a Percent of Global GDP

Figure 2[3]

Global Meat Production and Trade

From 1961 to 2003 total global meat production increased from 71 million tons to 271 million and trade increased from only 3.5 million tons to 26 million. As a percent of meat production global trade increased from about 5% in 1961 to about 10.5% in 2002. Furthermore, there is a high correlation between the increase in meat trade and per person global GDP. This correlation is no accident – as the world gets richer, the need to trade meat increases.

Figure 3[4]

Percent of Global Meat Production Exported and Global GDP/Person ($1995)

Why do we see this increase meat trade as incomes rise? The reason is as incomes go up there is a strong tendency for values of different meat cuts to diverge. It is, after all, value (not cost) differences that are the major driving force for trade, whether domestic or international.

A tendency for diverging parts prices can be seen clearly if the extremes of the world’s income range are compared. In relatively poor countries most meat is sold in wet markets, and there is little or no difference in value attached to different parts. The most extreme example is the live broiler market – the entire bird is sold for one price. On the other end of the spectrum there are places such as the U.S., Japanand Europe where different broiler parts have very different prices.

What is leading to this change in pricing? As people get more income they can afford to more selective about what they buy at the grocery store. The preferences are probably there all along, but people with limited income cannot be as picky about what they eat.

As pricing of the preferred parts increases producers have an incentive to increase production, but there is a problem. Even given all we know about genetics and animal rearing it is still impossible to create a 4 legged broiler for Japanor a 3 breasted broiler for the U.S.So as the production of the preferred parts increases so does the production of the parts people don’t like as well. Those less favored parts prices fall as their supply increases. In total producers continue to cover total costs, but cost recovery becomes more and more dependent on the willingness of consumers to pay premium prices for the parts they want most. A general diagram of this progression is shown in figure 4.

Figure 4

Parts values differentials and consumer income levels

We can see this phenomenon clearly in the price of U.S.broiler legs. Since 1971 the leg price has varied from about 30? to almost 60?, but relative to the whole bird price leg prices dropped from 120% to only 60%. At the same time the value of breast meat has taken up the slack left by the decline in the relative value of legs (and other dark meat). We see similar long term pricing trends in the U.S.pork, beef and turkey markets.

If all consumers had the same income and tastes as those in the U.S.this would not be a very interesting development for international trade. However that is certainly not the case. In many places the price of broiler legs is several times higher than in the U.S.In every case this is due to either a high cost of production for whole birds (Russia) or to a local preference for dark meat over white (a number of Oriental countries), or both.

Figure 5[5]

Prices of U.S.Broiler Legs Relative to the 12-City Price

Looking at the major international trade flows of meat in the world today we can clearly see that local tastes and incomes are driving important flows of meat, not carcasses. Here are some examples:

1. U.S.broiler dark meat to a large number of countries
2. Brazilian broiler dark meat to Japan
3. U.S.turkey dark meat to Mexicoand other destinations
4. Danish pork back ribs to the U.S.
5. Danish, Canadian and U.S.pork loins to Japanand Korea
6. Australian fed beef cuts to Japanand Korea
7. Australian and New Zealandlean beef to the U.S.
8. U.S.fed beef to Japanand Korea(suspended due to BSE)
9. U.S.variety meats to a large number of countries
10. U.S.chicken feet to China
11. Low value U.S.pork cuts to Russia
12. Danish bacon to the U.K.
13. Italian ham imports from all over Europe
14. Thai processed broilers to Japan(suspended due to Bird Flu)
15. Thai cooked broiler products to the EU and Japan

There also continues to be viable trade in live animals and whole carcasses, but this based on cost of production differentials not local demand. Examples include:

1. Canadian pork exports to the U.S.
2. Canadian live hogs exports to the U.S.
3. Canadian live cattle exports to the U.S.(suspended due to BSE)
4. Mexican feeder cattle exports to the U.S.
5. Brazilian whole broiler exports to the Middle East
6. Chinese whole broiler exports to Japanand Korea

The importance of parts exports, and the differing patterns by destination, can be illustrated by looking at the recent exports of any significant meat exporter. If we examine some recent Canadian pork exports, it looks like this:

Table 1[6]

Canadian Pork Exports, 2002, metric tons

Fresh and Frozen	U.S.top>	Japantop>		Mexicotop>	Koreatop>	Other	Total
> Carcasses	1,305	-		2,871	-	10	4,186
Hams	27,519	45,697		10,973	1	29,824	114,040
Backs, loins	23,045	50,286		674	48	6,484	80,537
Bellies	17,488	24,606		3,630	763	1,252	47,739
Shoulder, butts, picnic	21,158	46,410		6,282	3,168	7,847	84,865
Side & regular	214	893		74	395	4,911	6,487
Other boneless	105,913	13,662		13,187	1,669	52,087	186,518
Other bone-in	15,150	4,824		1,359	20,014	7,148	48,518
Offals	11	3,985		4,001	6,124	50,366	64,487
Processed
Hams cured	2,609	1		6	-	538	3,154
Backs, loins	679	41		-	-	245	965
Bellies, side bacon	0	55		895	-	1,089	2,039
Shoulders/butts/picnics	753	-		-	-	18	771
Pickled in barrels	0	-		-	-	4,495	4,495
Canned	44,489	7		28	5	292	44,821
Others	961	2,030		251	2	814	4,058
Total	261,294	192,497		44,231	32,189	167,420	697,680

Two things are obvious. First, essentially none of the large volume of Canadian pork exports is in carcasses. Second, the pattern of shipments is very different by country, and depends on the differing local demands of the destination nations.

The same is true of U.S.exports. In fact, essentially none of our meat imports, mainly pork and beef, are whole or half carcasses. Our pattern of shipments is also dramatically different by destination, especially for pork and beef.

So what does this mean to me?

As a participant in the global meat and poultry production system you are also, directly or indirectly, dependent on meat trade. Trade has been growing faster than production for decades, and when the current AI and BSE issues are resolved it will resume that growth path. Increasing meat trade is merely a reflection of a much larger trend in a global economy that is becoming increasingly trade-oriented.

Meat trade will continue to grow for one simple reason. As countries on the left-hand side of Figure 4 experience ever higher income levels, local tastes for parts of animals will emerge. In those country’s local markets some parts will go up in value, some will go down, and the opportunities for two-way trade will increase as a result. Local producers will seek out export markets for their parts with falling value, and traders from the outside will seek out opportunities to ship in those parts with increasing value. What these local value patterns will be we do not know, but we do know that they will emerge. Companies that are able to discover these price differences, and ship products from low price areas to higher price areas, will add value, both their own bottom lines and to the customers they serve.

And the news may even get better

It is remarkable that meat trade has been increasing in the face of some rather formidable political and economic barriers. Many countries, including the U.S., have put up significant barriers to the free trade in meat and meat products. We in the U.S.have strict import quotas on beef, and sanitary regulations on chicken that no other country can meet. Some other notable barriers would include:

1. The current ban on U.S.beef imports into Japan, and most of the rest of the world
2. An EU tariff-rate-quota on pork that effectively closes that market to imports
3. EU tariff rate quotas on beef and chicken that severely limit imports of both
4. Extremely high South Korean tariffs on all meat imports
5. A Japanese sliding pork tariff that escalates with increasing imports, and a very high beef tariff
6. High Philippine tariffs on pork and poultry
7. Mexican tariffs on poultry that essentially rule out imports
8. Newly imposed Russian tariff-rate-quotas on all meats
9. Very high Canadian tariff-rate-quotas on chicken imports that are designed to protect their production quotas
10. High Canadian tariffs on beef imports

According to USDA, the table below shows the approximate level of current tariffs on major meat products for selected countries in Asia, Europe and the Americas. The good news here is that the WTO process is gradually whittling down the highest of these tariffs, and as that is accomplished the potential for trade will grow.

The meat, poultry and dairy producers of the U.S.can play an important role here too. The U.S.is arguably the biggest winner as these barriers fall. Through commodity organizations, and the Meat Export Federation, they need to support free trade efforts, and accelerate this progress.

Table 2[7]

Meat tariffs and tariff equivalents for 2004 (% of value)

But even more important than tariffs is the fact that so many potential meat consumers are just now getting the income needed to express their preference for certain parts of animals. In Chinaand Indiaalone there are more than 2.3 billion people who have, up until now, not had enough income to demand more of the parts they really like. That will be changing over the next 10-20 years. And they are not alone. In Mexico, Brazil, the Middle East, and elsewhere, incomes are on the rise.

As their incomes increase, hundreds of millions of new middle class consumers will demand a meat supply that matches their local tastes. Domestic producers will not be able to supply that demand as efficiently as it can be purchased on the international market. Import barriers will fall further, trade will continue to grow, and we will all be better off as a result.

Yes, we will all benefit. There are no losers when trade increases. Trade also makes production more efficient, and reduces the resources needed to feed the world. Even the environment is better off as trade increases.

Are you ready to take advantage of the opportunities? More importantly, what are you doing to help promote trade?

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[1] Adjunct Fellow, Center for Global Food Issues, A Project of the Hudson Institute, and Adjunct Faculty, Department of Economics, IUPUI

[2] Source: World Bank

[3] Source: FAOSTAT

[4] Sources: World Bank (GDP), UN (population), FAO (% exported)

[5] Source: USDA, AMS

[6] Source: Ag Canada

[7] John H. Dyck and Kenneth E. Nelson. Structure of the Global Markets for Meat. Market and Trade Economics Division, Economic Research Service, U. S.Department of Agriculture, Agriculture Information Bulletin No. 785. September 2003.