TAIWAN HOG FARMERS FACE ECONOMIC STRESS

UNCLAS SECTION 01 OF 02 TAIPEI 000024 SIPDIS SENSITIVE FAS FOR OCRA/SMITH, OGA/OMEARA, OFSO/THURSLAND STATE FOR EAP/TC and EAP/RSP SIPDIS E.O. 12958: N/A TAGS: EAGR ETRD TW SUBJECT: TAIWAN HOG FARMERS FACE ECONOMIC STRESS SENSITIVE BUT UNCLASSIFIED ¶1. (SBU) Summary. Taiwan's hog industry is facing a severe cost/price squeeze that may force some restructuring of this key sector. The recent escalation of U.S. corn prices, combined with an oversupply of hogs on the local market, are the principal factors behind the economic stress. Hog producers are putting pressure on the Council of Agriculture for relief. Some local analysts and industry representatives describe the dominant U.S. share of Taiwan's corn import market and imports of U.S. meat products as a potent one-two punch that raise input costs while depressing output prices. Should the situation worsen, this simplistic anti-trade view has the potential to garner more widespread public attention. In an effort to forestall this development, AIT's Agriculture section, in coordination with U.S. grain trade representatives, is providing Taiwan agriculture authorities a more balanced economic analysis and is suggesting technical programs to assist Taiwan producers manage their price risk. End summary. ¶2. (SBU) Since at least this past fall, Taiwan corn importers and hog producers have become increasingly anxious over the increase in U.S. corn prices and whether the United States will remain a "dependable supplier" of this critical input. Over the years, Taiwan and the United States have built up a very strong trade relationship centered on the grain trade, now valued at nearly $1 billion each year, with corn accounting for just over half of the total. Taiwan has put this business partnership to good use to buttress the overall U.S.-Taiwan relationship. ¶3. (SBU) During a recent visit to Taiwan's southern agricultural base, AIT's Agriculture Chief met with academics, officials, and business owners to discuss current economic issues in livestock production, especially U.S. corn prices. Feed accounts for just over fifty percent of total production costs for Taiwan hog producers and corn is the single most important energy source in animal feed. Taiwan is completely reliant on imports to meet demand for feed corn and the U.S. has long been the dominant supplier. Through November 2006, the U.S. share of Taiwan's corn market stood at ninety-nine percent. ¶3. (SBU) The recent run-up in U.S. corn prices is largely due to the growing demand for ethanol in the United States. Government mandates to incorporate ethanol into the U.S. fuel supply, subsidies to promote the use of ethanol, and high petroleum prices have increased the profitability of ethanol in the United States. The volume of U.S. corn now used for ethanol and other industrial products exceeds the volume of corn exported to foreign buyers. This change in the demand structure for U.S. corn suggests that the price change will not be short-lived. ¶4. (SBU) In Taiwan, corn prices have increased significantly since July, a period when prices generally decline, thereby raising production costs. In an effort to minimize their expenses, some hog farmers are selling their hogs at a younger age and at lower weights. This has created a temporary oversupply of hogs on the market, driving down the market price they receive and exacerbating the high input cost/low output price squeeze. In some cases, hog farmers are taking a loss on every animal they sell. The hog industry, accounting for just over fifteen percent of total agricultural output by value, has pressured the Council of Agriculture (COA) for relief and, in November, Taiwan temporarily opened its market to imports of PRC corn. While negotiations between Taiwan buyers and China's grain export authorities are ongoing, no deals have yet been struck. ¶5. (SBU) The market will eventually correct these imbalances, most likely through higher live hog and pork prices, but the length of time it takes to make that adjustment is of critical importance to individual producers. One major producer said that if current conditions prevail for another six months, he would go out of business. Two other producers, one raising a native breed for a localized niche market and the other a more integrated, highly efficient operation, said they would be able to weather the current problem, albeit with little or no profit. ¶6. (SBU) The end result could very well be further consolidation of the industry, development of more integrated operations, and slightly lower output levels. Such an outcome would be an improvement over the current production environment and generally consistent with Taiwan's plans to increase overall agricultural productivity. COA will likely continue to face political pressure TAIPEI 00000024 002 OF 002 from producers and others whose livelihood may be threatened by these adjustments. While domestic conditions and policies certainly contribute to the current economic problems facing hog producers, it is possible that attention will instead be focused on the role of U.S. agriculture exports and trade in general in an effort to shift attention away from these domestic factors. Indeed, most of the experts interviewed by AIT noted the dominant position U.S. corn has in Taiwan's market and the downward pressure on hog and pork prices due to imports of U.S. meat as reasons for the economic stress. ¶7. (SBU) In an effort to forestall the development of an anti-trade message as Taiwan copes with the new price environment, AIT's Agriculture section is coordinating with Taiwan-based U.S. grain trade representatives to provide Taiwan authorities with an objective analysis and outlook for corn prices. AIT and these representatives are also developing programs to train grain buyers and livestock producers on price risk management techniques. WANG