Ractopamine (Beta Agonists), Export Restrictions, and MATH
China has restricted the use and importation of beta agonist compounds and meat from animals fed beta agonists for years. Ractopamine has been recently listed by both China and Russia in new requirements to have imported meat be certified free of the compound prior to import. In an illogical move, Taiwan restricts pork produced with ractopamine but not beef; ironically, they also have a substantial pork industry but not much of a beef industry. The European Union also restricts beta-agonists in meat imports. These “requests” by overseas governments (not consumers) are beginning to impact U.S. production practices.
Ractopamine is an Elanco (Eli Lilly) product, marketed under the brand names Paylean® (for pigs) and Optaflexx® (for cattle). Other beta agonists exist as well such as Merck’s zilpaterol, marketed as Zilmax® (for cattle). These beta agonist feed compounds were developed as “clean, green” alternatives to hormone-based growth promotants. All are FDA-approved and have proven effective and safe as feed-efficiency compounds. The international food standards body Codex adopted maximum-residue-level (MRL) standards for ractopamine last July, endorsing their view of the product’s safety. Pigs fed ractopamine typically get to their finished weight using about half a bushel less corn than their counterparts that do not utilize the compound. Cattle that are fed ractopamine reach their final weight 8 days faster than their non-beta agonist counterparts, consuming an average 2.3 bushels less corn. More on corn impacts below.
With new Russian and Chinese requirements that U.S. pork exports be certified to have been produced without the feed-efficiency compound ractopamine, U.S. farmers and processors have some big decisions to make. These decisions come down to hard numbers. We offer the following analyses and math as unbiased research designed to provide economic context to this murky issue:
- The U.S. exported pork and pork products to 116 countries in 2012, 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 pounds of U.S. pork and variety meats (offal) from each U.S. barrow and gilt slaughtered. Russia averages 2.3 pounds and Taiwan averages 1 pound. A combined 11 pounds of each live hog is destined for these markets.
- Ractopamine adds roughly $6/head in added muscle meat value (at the wholesale price level). Foregoing that benefit for the 11 pounds shipped to China, Russia, and Taiwan is the equivalent of a $0.53/lb price hike to compensate for the lost value. The lost value from foregoing ractopamine in hogs will not be offset from price premiums to export markets alone.
- The average export price of U.S. pork and variety meats to China over the past two years was US$0.82/lb (both pork and variety meats were valued very closely on a per pound basis), so a US$0.53/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 US$1.34/lb, so adding US$0.53/lb increases the export price to Russia by 39% . We know that due to market leverage and structure, such price hikes cannot be obtained with ractopamine-free pork in China and Russia. Said another way: Export markets alone will not compensate for the cost of foregoing ractopamine.
- That $6/head ractopamine benefit, spread over an entire carcass requires only a 2.8 cent/lb premium to recoup the lost $6/head. And while we have seen large carcass orders by China, these orders have historically been very big, but were very short lived.
- Lost export sales do not translate to industry loses 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 will see reduced sales 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 meat value of $6/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 (see next point).
- If an estimated 90% of U.S. pigs have been utilizing the compound, then the complete removal from the U.S. pig sector would lead to an additional 50 million bushels of corn needed to feed pigs to current carcass weights. If an estimated 70% of cattle utilize beta agonists, the removal of beta agonists from U.S. cattle would require an additional 41 million bushels of corn. Without beta-agonists, U.S. livestock would likely continue to be fed to current weights, but would require a combined additional 91 million bushels of corn to get there. At $6.80/bushel that corn value is $619 million.
- That is not a significant amount of corn for most years, but that amount on last year’s production would reduce USDA’s estimated ending stocks to 541 million bushels taking the stocks to use ratio to 4.7%, the lowest level in history. As it stands today, ending stocks of 632 million bushels put us at the 3rd lowest ratio in history. These current stocks will provide for 3 weeks of corn at the end of the crop year (when the next harvest starts). 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, U.S. cattle and pig production will use an additional 91 million bushels of corn in the next crop year.
- The largest “indirect” impact of these export restrictions is their blame in the $10/cwt decline in U.S. hog futures. Psychology around meat trade bans has historically increased market volatility. That impact is real and may offset all the above 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 above would continue into perpetuity.
In all three current 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 usage of these FDA-approved compounds.
Careful analysis should be undertaken in decisions that can shift U.S. production to this extent. As shown above, export markets alone will not bear the lost value from foregoing ractopamine production. Unless consumers here at home are willing to pay a premium, the future of ractopamine-free pork remains cloudy.