FOR years, China has restricted the use and importation of beta-agonists and meat from animals fed beta-agonists.
Ractopamine, a compound used for livestock feed efficiency, was recently listed by both China and Russia in new requirements that imported meat must be certified as free of the compound prior to import.
Taiwan restricts pork produced with ractopamine, but not beef; ironically, the country has a substantial pork industry, but not much of a beef industry.
The European Union also restricts beta-agonists in meat imports.
These "requests" for ractopamine-free meat by overseas governments (not consumers) are beginning to affect U.S. production practices. With Russia and China now requiring that U.S. pork exports be certified as produced without ractopamine, U.S. farmers and processors have some big decisions to make. These decisions come down to hard numbers.
The following analyses and math are unbiased research designed to provide economic context to this murky issue:
* The U.S. exported pork and pork products to 116 countries in 2012, and 101 of them accept beta-agonist usage in pork (79% of U.S. pork export volumes).
* Over the past two years, China's import volumes have averaged 8.4 lb. of U.S. pork and variety meats (offal) from each U.S. barrow and gilt slaughtered. Russia averages 2.3 lb., and Taiwan averages 1 lb. A combined 11 lb. of each live hog is destined for these markets.
* Ractopamine adds roughly $6 per head in extra muscle meat value (at the wholesale price level). Foregoing that benefit for the 11 lb. shipped to China, Russia and Taiwan would be the equivalent of a 53 cents/lb. price hike to compensate for the lost value.
* The average export price of U.S. pork and variety meats to China over the past two years was 82 cents/lb. (both were valued very closely on a per-pound basis), so a 53 cents/lb. price hike to cover the ractopamine-free premium would be the equivalent of a 61% price hike for U.S. pork to China. The exported price to Russia over the past two years averaged $1.34/lb., so the export price hike to Russia would be 39%.
Due to market leverage and structure, such price hikes cannot be instituted just for ractopamine-free pork in China and Russia. Said another way: Export markets alone will not compensate for the cost of foregoing ractopamine use.
* Recouping that lost $6-per-head ractopamine benefit, spread over an entire carcass, requires a premium of only 2.8 cents/lb., and while China has made large carcass orders before, these orders have historically been very big but very short-lived.
* Lost export sales do not translate into industry losses at a 1:1 ratio. These three export markets bought a total $946 million of U.S. pork in 2012. Even if exports ceased to those markets (none of these markets are closed, but sales will be reduced in 2013), that product would still be sold somewhere. Offal may go into rendering, and some cuts may be discounted, but that does not translate into a $946 million loss to the U.S. hog industry.
* The lost wholesale value of $6 per head of additional meat from utilizing ractopamine in pork equates to $508 million in reduced pork production and sales, unless hogs are fed to the same finished weight without utilizing the compound.
* If an estimated 90% of U.S. pigs have been utilizing ractopamine, then its complete removal from the U.S. pig sector would create the need for an additional 50 million bu. of corn to feed pigs to current carcass weights. If an estimated 70% of cattle utilize beta-agonists, then their removal from the U.S. cattle industry would require an additional 41 million bu. of corn.
Without beta-agonists, U.S. livestock would likely continue to be fed to current weights but would require a combined 91 million bu. of additional corn to get there. At $6.80/bu., that corn value would be $619 million.
* That is not a significant amount of corn in most years, but taking that amount from last year's production would reduce the U.S. Department of Agriculture's estimated corn ending stocks to 541 million bu. and would take the stocks:use ratio to 4.7%, the lowest level in history.
Ending stocks today are at 632 million bu., the third lowest in history and the equivalent of about a three-week supply of corn. While no one knows what Mother Nature will bring this summer, we may be counting kernels in the bins come August. If the drought persists this summer and beta-agonists are pulled from all livestock feed, that additional 91 million bu. of corn might be hard to find.
* The largest "indirect" impact of these export restrictions is their share of the blame in the $10/cwt. decline in U.S. hog futures. The psychology of meat trade bans has historically had the effect of increasing market volatility. That impact is real and may offset all of the aforementioned impacts in the short term. However, while compliance with these restrictions may have prevented some or all of the market drop, the long-term costs of compliance outlined would continue into perpetuity.
In all three export situations (Russia, Taiwan and China), the beta-agonist issues smack of a strong political element. The new regulations were not driven by overseas consumers. In fact, most consumers in Russia and China would not likely know of the ractopamine issue. Similarly, U.S. consumers have yet to show significant concern over the use of these Food & Drug Administration-approved compounds.
Careful analysis should be undertaken in decisions that can shift U.S. production to this extent. As explained, export markets alone will not bear the brunt of the value lost from foregoing ractopamine use. Unless U.S. consumers are willing to pay a premium, the future of ractopamine-free pork remains cloudy.*Brett Stuart is a founding partner of Global AgriTrends, (www.globalagritrends.com), a full-service firm dedicated to providing market intelligence and analysis of global agricultural trade. He was formerly lead economist with the U.S. Meat Export Federation, where he conducted numerous research and analysis projects in the global meat trade arena as well as advising U.S. trade officials on international meat access issues.
Ractopamine is a product of Elanco animal health marketed under the brand names Paylean (for pigs) and Optaflexx (for cattle). Other beta-agonists exist as well, such as Merck Animal Health's zilpaterol, marketed as Zilmax (for cattle).
These feed compounds were developed as "clean, green" alternatives to hormone-based growth promotants. All are approved by the Food & Drug Administration and have proved effective and safe for feed efficiency.
The Codex Alimentarius Commission, an international food standard-setting body, adopted maximum residue levels for ractopamine last July.
Pigs fed ractopamine typically get to their finished weight using about 0.5 bu. less corn than pigs that are not fed the compound. Cattle fed ractopamine reach their final weight eight days faster and consume an average of 2.3 bu. less corn than cattle that are not fed beta-agonists.