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ANIMAL DISEASE CONCERNS CLOUD MARKET AND PRICE OUTLOOK IN 2006

Global meat markets in 2006 have again been affected by animal disease concerns after experiencing a brief market recovery in 2005. Shaping meat market developments in 2006 are the dramatic consumer responses to the increasing incidence of avian influenza (AI) outbreaks, as well as continuing BSE-related bans on North American beef and FMD-related bans on South American red meat exports (bovine, sheep and pigmeat).

From late 2005 to early May 2006, AI outbreaks had been reported in approximately 40 previously unaffected countries, many of which are the major poultry consuming and importing countries of Europe, the Middle East and Africa. Infection of over 224 people, with over half resulting in deaths, has been the primary reason for the ensuing dramatic consumer responses and trade bans. The shift in consumption away from poultry meat has led to rapid build-up of stocks and price declines, which will significantly affect market developments in 2006.

In a reversal from 2005, when the FAO meat price index (calculated using trade weighted indicative international prices) peaked at a near 15 year high of 126 points, sharply lower poultry prices in early 2006 have prompted a decline in the index to 112. While the poultry index has plummeted 22 points since October 2005, beef prices remain at high levels due to continued disease-related trade bans on North and South American exports, in response to BSE and FMD concerns respectively. During 2006, more than adequate poultry supply availabilities are expected to be large enough to put all meat prices under downward pressure. However, beef export supply constraints in 2006 may provide some underlying support to beef prices.


PRODUCTION

Meat production prospects hinge on consumer and trade responses to animal disease concerns
A weakening of meat demand, uncertain price prospects and escalating trade restrictions in 2006 are expected to limit global meat output in 2006 to 272.5 million tonnes. While relatively low feed prices are prompting higher pig meat and beef output, an unexpected and unprecedented decline in poultry meat output will, in 2006, likely limit aggregate meat output gains to less than two percent, down from 3 percent in the previous year.

While output gains in developing countries, projected at 2.5 percent, will be half that of 2005, their contribution to global output is expected to rise in 2006 to nearly 60 percent of global production, up nearly 1 percent from the previous year. However, unlike previous years when strong growth in export-oriented South America contributed to nearly half of developing country output gains, meat production in this region is forecast to grow only 1 percent due to policy developments and FMD-trade bans. Consequently, developing country gains are likely to be concentrated in Asia, as consumers change their consumption patterns. In developed countries, lower poultry production will contribute to a lacklustre meat industry outlook despite a projected recovery in pig meat and beef production after two years of stagnant growth.

High beef prices prompt higher slaughter
Supported by a recovery in North America and Asia, global beef output is expected to rise 2.5 percent in 2006 to nearly 66 million tonnes. While estimates of cattle inventories in developed countries remain at their lowest levels, production is projected to increase by over 2 percent, in stark contrast to the contraction registered over the past four years. Poor United States grazing conditions and an influx of cattle imports from Canada are supporting record numbers of cattle on feed in the United States, the world’s largest beef producer. Meanwhile, EU beef supplies, after policy induced declines in previous years, are expected to rise with the elimination of the BSE-related Over-Thirty-Month-Slaughter policy, which has been in place over the past decade. In Canada, however, beef output is expected to drop, possibly as a result of stabilizing cattle inventories and larger shipments of live animals to the United States.

The contribution of developing countries to global beef production will remain at 55 percent in 2006, despite a weakening of growth to 2.7 percent, nearly half of that in the previous year. The main reason for this slow-down is the reduction in the pace of slaughtering due to FMD in South America, a region which has accounted for more than one-third of developing country production gains since 2000. Partial or total trade bans by over 50 countries on Brazilian beef exports are putting downward pressure on local prices and dampening output prospects. Some support to international prices was provided by an early year Argentine policy to introduce a six-month partial ban on beef exports, which has already led to a sharp drop in domestic prices and is expected to influence production prospects negatively. Most of the developing country output growth is expected to take place in Asia, where consumers are substituting beef and pig meat for poultry. The 4 percent expected increase in beef output is reflecting rising beef prices and a strong supply response in China, the fourth largest producer of beef and home to over 138 million head of cattle.

Strong Asian demand support pig meat production
Driven by robust output gains in developing countries in Asia, global pig meat output is expected to reach 107 million tonnes, up over 3 percent. Shifting meat consumption patterns in Asia, a region which accounts for 60 percent of global pig meat consumption, is prompting larger output in the Philippines and Viet Nam. Although hog prices are declining in China, the world’s largest pig meat market, increased efficiency in rapidly growing commercial operations is fostering an increase in output. South America prospects, as with beef, are constrained, as FMD in Brazil, which accounts for nearly 70 percent of regional production, dampens growth prospects to only 1 percent, down from 6 percent in 2005. This is despite favourable outlooks for the industries in Bolivia, Venezuela and, in the increasingly export-oriented, Chile and Mexico, both of which have recently benefited from trade agreements with Japan. In developed countries, output is expected to rise in the USA, Canada and the EU as increased industry concentration, particularly in the first two countries, is supporting efficiency gains and production growth in the context of lower inventories and breeding herds.

Lower prices to stifle poultry output gains
In a stark market reversal from the previous two years when poultry prices rose over 30 percent in the context of AI-induced deficit in exportable supplies, recent human health concerns in many of the major consuming countries are lowering prices, chick placement and poultry production prospects. As AI outbreaks engulfed hitherto 40 unaffected countries (23 in Europe, 9 in Asia and 7 in Africa) over the past eight months, consumption has dropped precipitously. The resulting decline in poultry prices by between 10-40 percent in the affected countries, has eroded industry profitability. This, combined with AI-related bird culls, are projected to cause a reduction in global poultry production by an unprecedented 1 percent to 81 million tonnes.

Per caput consumption in developed countries is estimated to decline by 3 percent to 27 kg in 2006, mainly in Europe where some countries experienced decreases of up to 70 percent. The implied changes in international prices are being transmitted to export-oriented countries, such as Brazil and the United States, which have not reported disease outbreaks, thus limiting their production prospects. After a brief recovery from AI in 2005, Asian poultry production is estimated to fall by 1 percent, with declines expected in both in countries that have not experienced any outbreaks, such as Bangladesh and Nepal, and in nine others that have. Meanwhile, the continuing spread of AI in African countries, such as Burkina Faso, Côte d’Ivoire, Egypt, Niger, Nigeria and the Sudan, will likely reduce regional production by nearly 5 percent. An estimated 5 percent decline in per caput consumption to 4.5 kg has potential implications for livelihoods and food security in a region where poultry contributes nearly 30 percent to total meat availabilities.

Developing countries dominate ovine meat output gains
Supported by expected strong prices and output gains in major Asian developing countries, such as China, the Islamic Republic of Iran and Pakistan, global ovine meat production in 2006 is foreseen to rise nearly 2.6 percent to 13.3 million tonnes. In South America, government sponsored recovery programmes for the sheep industry in Argentina and Uruguay are supporting a second year of strong growth. As output in developed countries has steadily contracted over the past decade, developing countries have increased their share of global production from 65 percent to an estimated 75 percent in 2006. Developed countries, however, are likely to increase production in 2006 due to persistent drought in some countries, an expansion of breeding flocks, increased off-take and enhanced productivity. This is despite a decline in EU sheep meat production, where animal inventory numbers have not recovered to allow levels of production achieved before the FMD crisis in 2001.

UTILIZATION

Animal disease issues are affecting demand for all types of meat products
The evolution of human health concerns related to AI, the duration of disease-related trade bans, and relative demand and price shifts are largely influencing meat market prospects in 2006. Despite some expected switching between meats in 2006, a nearly 4 million tonnes downward revision in the 2006 forecast for global poultry meat consumption is expected to limit overall growth in meat consumption to its lowest level observed in the past 25 years. Expressed in per caput terms, total meat consumption is expected to increase only marginally to 41.7 kg. A more than 2 percent decline in per caput consumption of poultry meat to 12.4 kg has been sufficient to cancel most of the gains in other meats, particularly pig meat. The wide disparity in per caput meat consumption levels that exists between developed and developing countries in 2006, at 83 and 31 kilos/caput respectively, is set to narrow marginally as consumption declines in the former. Per capita consumption gains are expected in developing countries, but at half of their historical rates.

TRADE

Import bans and demand shocks to limit meat trade gains
Sluggish global poultry import demand, the imposition of animal disease related trade bans, and uncertainty about meat import policies in the Russian Federation are combining in 2006 to limit meat trade growth to 20.7 million tonnes. Curtailed back dramatically from the nearly 8 percent gains witnessed in 2005, meat trade is forecast to increase less than 1 percent, the slowest rate in 25 years, excluding the disease induced drop in 2004. Exports from developing countries are set to decline marginally as prospects for South American meat shipments stumble after growing at a double digit level for the past decade. Despite a drop in EU meat exports due to trade-related AI bans, strong United States meat exports in the context of competitive prices and an eroding exchange rate should help maintain the developed country share of global trade at 54 percent.

Poultry trade to drop as consumers shift to other meats
As poultry consumption drops in the newly AI-affected regions in Europe, some areas of Central Asia and the former Soviet Union, as well as parts of Africa, poultry trade prospects are gradually detiorating in 2006. Lower import demand in these countries, which account for approximately one-third of the global imports market, is expected to lead to an estimated 3 percent decline in trade to 8.0 million tonnes. Export prospects are also estimated down in Brazil and the United States, suppliers of approximately 70 percent of global poultry trade, where export prices dropped between 20-50 percent in early 2006 as a result of lower import demand and the filling of cold stores. The reports of AI outbreaks in some commercial flocks in the EU and the imposition of trade bans is expected to reduce EU exports by nearly one-quarter, despite an increase in export refunds for both whole birds and cuts.

With high stocks and low domestic prices, EU imports are likely to fall despite the mid-year tariff cuts on frozen boneless chicken cuts imposed by the WTO. Meanwhile, market uncertainty in the Russian Federation, the world’s largest poultry importer, as poultry import permits were cancelled due to sanitary irregularities and later reissued is expected to lead to lower imports. Deliveries to other regions, such as disease-affected countries in Africa, may actually increase. For example, in Egypt, where consumption and egg and poultry prices dropped by 30-40 percent after the first outbreaks, the recovery in consumer confidence is pushing up chicken prices fivefold to record levels. Poultry are reported to be in short supply because of loss of breeding stocks and the inability of industries to respond quickly to changing demand. One implication of the rapid consumption recoveries that characterize market response to AI is that countries that are heavily dependant on poultry as an income earner for rural smallholders may be forced to import frozen chicken to meet urban demand.

Stronger trade in beef despite relatively high prices
The limits on beef export supplies observed earlier in the year are expected to be gradually lifted later in the year, leading to an estimated 3 percent rise in global beef trade, to 6.7 million tonnes. However, South American beef exports, after averaging 22 percent annual gains over the past five years, are projected to decline 1 percent in 2006, despite a potential lifting of the Russian Federation ban on Brazilian beef. This is particularly fuelled by the Argentine decision to partially ban exports over the first six months of the year, which is expected to reduce shipments by one-third. While beef markets remain largely segmented between FMD-free and non-FMD zones, some redirection of trade flows will support exports from the EU (despite a 10 percent reduction in beef refunds), Australia, China and India. Meanwhile, although the United States beef shipments are foreseen to increase by more than half, supported by the opening of some selected Asian markets, shipments will likely be less than half of the pre-BSE exports in 2003.

Despite strong international beef prices, global beef import demand will be supported by stronger Asian demand and trade as BSE concerns are overtaken by those related to AI. Increasing market access into Republic of Korea, the Chinese province of Taiwan, Malaysia and the Philippines will more than offset slower import growth by Japan, where import levels are not projected to reach pre-BSE levels. Meanwhile, despite China’s approval of selected exporter plants, imports are set to remain low, constrained by Sanitary-Phyto-Sanitary (SPS) barriers imposed in late 2005. Continued growth will also originate from Mexico, while EU imports will ease slightly as FMD limits availabilities from traditional suppliers in South America.

Pig meat import demand supported by poultry trade losses
Buoyed by expected trade losses for poultry and competitive prices, trade in pig meat is expected to increase 3 percent to 4.9 million tonnes. While imports are growing in some of the major markets, including Hong Kong, SAR Mexico, the Russian Federation and Singapore, overall Asian imports, the recipients of nearly half of global imports, are projected to decrease their purchases in 2006. High frozen pig meat stocks in Japan, some substitution with beef in the Republic of Korea and other markets, and China’s imposition of sanitary barriers on imports will limit regional trade gains in Asia. Favourable exchange rates will support United States exports, while Canadian and EU shipments will benefit from the current FMD-related trade bans on Brazilian products. Some market uncertainty stems from the Russian Federation’s potential decision, in the context of its reported tight supplies and high prices, to lift the ban on meat imports from some Brazilian states, such as Rio Grande do Sul and Santa Catarina. Product shipments from non-traditional exporters, such as Chile, Mexico and Poland will continue to be facilitated by bilateral trading agreements and sanitary agreements with Japan.

Export availabilities maintain ovine meat trade prospects
While slowing from the 9 percent gains registered in 2005, sheep meat product trade is expected to increase by only 4 percent in 2006. While trade is forecast to rise to 811 500 tonnes, only limited growth is expected in the major import markets in North America and Asia. Increased supply availabilities in the United States as a result of lamb support programmes will likely constrain import demand in that market. This will be offset, however, by rising demand in Mexico and countries in Europe, the Middle East and some markets in Africa, as demand for poultry falters. Adequate supplies in Oceania, the supplier of nearly 90 percent of global shipments, will facilitate the increase in global exports with increased products also sourced from China and Uruguay.