VZCZCXRO0080
PP RUEHGH
DE RUEHIN #0024/01 0050322
ZNR UUUUU ZZH
P 050322Z JAN 07
FM AIT TAIPEI
TO RUEHRC/USDA FAS WASHDC PRIORITY 2597
RUEHC/SECSTATE WASHDC PRIORITY 3615
INFO RUEHKO/AMEMBASSY TOKYO 8339
RUEHBJ/AMEMBASSY BEIJING 6152
RUEHBY/AMEMBASSY CANBERRA 4399
RUEHML/AMEMBASSY MANILA 9881
RUEHHK/AMCONSUL HONG KONG 7383
RUEHGH/AMCONSUL SHANGHAI 0669

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