MONEY

Feeding China: More open China market 'only a matter of time'

Lynn Hicks
lhicks@dmreg.com

China produces most of the pork it needs now, but Dermot Hayes calls that unsustainable. He sees "unbelievable potential" for U.S. pork producers if China opens its doors.

"This opportunity could transform the U.S. pork industry and Iowa agriculture," said Hayes, Iowa State University's Pioneer chair of agribusiness.

Now, China is the fifth-largest U.S. export market for pork, behind Japan, Mexico, Canada and South Korea, U.S. Department of Commerce data show. Trade barriers — such as China's ban on a feed additive — have blocked more sales.

If China completely opened up, Hayes said, more efficient producers around the globe would step in, and China's domestic production would fall to 50 percent or below. If the U.S. got only one-third of this new market, that would be 18 million tons of pork — twice as large as the current U.S. pork production.

The number is staggering, and Hayes isn't predicting it will happen, mainly because Chinese leaders don't want to depend on another country for the nation's most popular meat. But he says "it is only a matter of time" before the Chinese government must consider a more open market because of high food costs, pollution, disease fears and other problems associated with pork production.

South Korea and Japan made similar decisions, and now import 30 percent to 50 percent of their pork.

He acknowledges that if China suddenly opened up, it would "cause wild gyrations in world prices."

In a paper for the University of Chicago's Paulson Institute, Hayes has proposed solutions that he believes would benefit both the U.S. and China:

Long-term production contracts: Chinese investors would invest in new hog farms and processing plants in Iowa or other areas that can produce more efficiently. The Chinese would own at least a portion of the facilities as well as the animals.

"This development would provide the Chinese consumer with a sense of food security along the supply chain, but also reduce world price volatility and result in much lower meat cost for Chinese consumers," he says. In return, the U.S. would gain jobs, a guaranteed market for pork, capital financing for young farmers wanting to raise hogs, and a source of manure for fertilizer.

Hayes said Chinese pork producer WH Group found a much simpler solution than long-term contracts, by simply buying U.S.-based Smithfield Foods.

"Animal parts arbitrage": Chinese love pork, but not in the same way Americans do. Chinese have a taste for variety meats — such as organs, ears, heads, hooves and other cuts — that many U.S. processing plants throw away. Long-term contracts could assure U.S. companies a steady demand for the parts.

Any increase in U.S. production to feed China is sure to come with concerns. Pig production has increased in Iowa by 36 percent in the last 20 years, the U.S. Department of Agriculture reports.

Producers who plan to expand face protests over odors and concerns that state rules aren't strong enough to protect water quality.

Indeed, some policymakers in China are reportedly quietly debating whether to leave the disease and pollution to the U.S., and take the meat. After the Smithfield purchase, critics asked: Will America become China's factory farm?

"We may be running out of decent places to site barns," Hayes acknowledged. However, he said, Iowa corn growers need the natural fertilizer the confinements produce.

"Very few places in the world can use manure like we can," he said.

The racto debate

China's ban on ractopamine, a feed additive to promote leanness, has hit Iowa producers directly.

The Chinese government last month declared six U.S. pork processing plants ineligible to export to China, including Tyson Food plants in Perry and Storm Lake. Other plants affected were near Iowa's borders: Fremont, Neb.; Austin, Minn.; and St. Joseph, Mo. Producers must prove, through a third-party source, that they are ractopamine free.

The medication, known as a beta-agonist, was originally used for asthma patients. It is made by Indiana-based animal health firm Elanco under the brand name Paylean. Widely used in the United States, the ingredient helps hogs use feed more efficiently and quickly put on muscle. The world is divided on its use: The FDA and an international food-safety body have approved its use, but the European Union, China, Russia and others ban it.

Critics say not enough studies have been done to determine whether meat containing ractopamine is safe for humans. Others suggest enforcement of the ban has more to do with politics or economics than science, since the ban preserves market share for Chinese producers.