March 28, 2018
America's swine sector: Prosperous, but with a dark cloud approaching
The threat of retaliatory Chinese import tariffs casts a shadow over rosy US pork production forecasts.
By Eric J. Brooks
An eFeedLink Hot Topic
Provided nobody rocks the boat, America's swine sector is on its way to another prosperous year, with a world-leading 32% share of the world market. It is part of an optimistic forecast that could be rudely interrupted by politics anytime after this article is published.
Coming into 2018, both supply and demand were on the side of America's swine sector. Boosted by several years of aggressive growth in domestic consumption, exports and strong returns, its 73.3 million head its 72.2 million head hog population was at its highest level since the early 1940s.
While the bloated hog population boosted supply, the opening of several large new pork processing plants boosted demand. Along with strong export growth, this kept pork prices high even amid aggressive production increases. At several integrators, returns were boosted via costs savings gained when nutrients from pig manure were used on feed crops in place of commercial fertilizer.
After falling 1.5% and bottoming out during 2014's PEDv epidemic at 10.37 million tonnes, America's production increased at a 4.2% average rate over the last three years. More of the same is expected in 2018: Pork production is projected to increase a USDA estimated 4%, from 2017's 11.72 million tonnes to 12.19 million tonnes this year.
It is complemented by domestic consumption, which also increased after rising 9.4% in 2015 increased by 1.4% in 2016 and 2017. With consumer incomes growing and pork priced reasonably compared to other meats, US pork consumption will rise a faster than usual 2.8%, from 2017's 9.60 million tonnes to a record 9.87 million tonnes. It puts estimated 2018 per capita pork consumption at 23.6kg, nearly 11% higher than the 21.2kg consumed five years ago in 2013. For a mature, high-income market like America, that is impressive rebound in red meat consumption.
With a rising hog herd boosting supplies, the most value-added but volatile portion of US pork's fortunes is exports. Here too, there was good news: After rising at a 3.9% average annual rate from 2014 and total 2.59 million tonnes 2017, the USDA forecasted a sharper 4.5% rise, to a record 2.71 million tonnes -but all this could go badly wrong.
According to the US Meat Exporters Federation (USMEF), America shipped nearly 500,000 tonnes of pork valued at US$1.078 billion to China and Hong Kong in 2017. That accounted for 19.6% of US pork exports by volume and 16.6% of total export revenues of US$6.486 billion.
Nearly 400,000 tonnes or at least US$850 million of this amount went to China. Rabobank had previously forecasted 2018 America's pork exports to China (including Hong Kong) to total approximately 615,000 tonnes and US$1.3 billion in 2018. So long as nothing upsets the forecast, 500,000 tonnes or at least US$1.05 billion would be imported by mainland China. That would be a 24% increase on the USMEF estimated 495,637 tonnes shipped to China and Hong Kong in 2017.
Powered by previous Chinese acquisitions of large US pork integrators, analysts noted that late 2017 and early 2018 export growth was strong, with shipments to China showing a particularly aggressive expansion. Thereafter, the first quarter of 2018 saw America impose import tariffs of 25% on Chinese steel and 10% on aluminum.
In March, this was followed by America signaling its intention to tax or block Chinese imports of aerospace parts and wide range products allegedly containing stolen US intellectual property. China does not take such threats to its trade lightly and responded almost immediately: It put America on notice that it may soon raise import tariffs on pork and several other US imports by 25%.
This caused an immediate plunge in the stock market value of US-based pork integrators known to export to China. The reason is quite apparent: Excluding shipments to Hong Kong, China would have accounted for at least 18% of this year's US pork exports. Depending not just on if but when they impose such proposed import duties, US pork exports to China could fall by up to 200,000 tonnes this year and 300,000 tonnes years to come.
Instead of rising a healthy 4.5%, 2018 pork exports might be no higher than they were in 2017. Over the short term, it would bloat domestic pork inventories, depress prices of everything from live hogs to pork cuts and depress earnings by up to 20%. Over the longer term, the US would lose part of its large share of the world pork market. Canada, Brazil and EU suppliers would happily divide America's large share of the Chinese market among themselves.
In an interview with AgDay, Perdue University agricultural economist Chris Hurt estimates that China's proposed tariff would lower US pork production by 2% or 244,000 tonnes. Hurt also stated that the resulting oversupply could slash US live hog prices by up to US$7/head or 12% from their US$58/head level at the time he was interviewed. That could result in profits coming in up to 20% or more below expectations.
In a March 27th interview with Reuters, CEO and president of US-based (but Chinese owned) Smithfield Group put a brave face on the situation. On one hand, despite being owed by the Luohe-based WH Group (previously known as Shuanghui Group), Sullivan notes that only7% of Smithfield pork production is exported to China. On the other hand, being a business with thin profit margins, profits can fall by several times more than the change in revenues. That's why Smithfield's stock fell 12% on news of China's threat to impose import taxes on US pork.
Moreover, the impact of Chinese trade barriers would be greater than what the attached graph suggests: While the total sum of pork exported to China and Hong Kong was 400,000 tonnes in 2008 and a projected 615,000 tonnes this year -but ten years ago Hong Kong accounted for a majority of pork imports (which were often smuggled into China). The actual volume of US pork exported to China itself has risen by a factor of five and is very vulnerable to Beijing's trade war counter moves.
This year, China will account for at least 500,000 tonnes of the 615,000 tonnes of US pork that will be exported to both itself and Hong Kong. Provided China does not impose a tariff, the volume of pork exported to China and Hong Kong will have increased by 54% over ten years but its value will have risen by 88% --with $1.1 billion of projected US$1.3 billion in 2018 US pork earnings from Hong Kong and China under the latter's control.
The good news is that China's proposed countermeasures may not happen: In late March, both China and American treasury secretary Steven Mnuchin said that they would attempt to negotiate a solution to this trade dispute. Nevertheless, US pork producers have no assurance that they will continue to enjoy unimpeded access to China, which imports twice as much pork as any other country.
Moreover, while exports to China have been growing rapidly, it is not the largest market for US pork exports. Japan's 393,648 tonnes of imported US pork in 2017 was slightly less than the volume imported by mainland China but at US$1.63 billion, exports to Japan were worth nearly 50% more than revenues earned from Chinese-destined shipments.
Similarly, the 801,887 tonnes of pork shipped to Mexico and US$1.51 billion in earnings mean that US pork exported to its NAFTA trade partners greatly exceeds that of China on both a value and volume basis -though this too is subject to ongoing NAFTA trade negotiations.
The bad news is that America's ongoing trade negotiations with China could fail. If they do, exports to China and Hong Kong could go from this year's projected 600,000+ tonnes to around 200,000 tonnes or less in 2019. Despite earlier rosy predictions that their multi-year boom would continue, America's swine sector is entering the second quarter of 2018 under a cloud of doubt and uncertainty.
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