April 19, 2019
Worst case scenario materializes for China's ASF-plagued swine sector
ASF-induced hog mortality may exceed the combined swine inventories of the US, Canada, Brazil, Germany and Spain. Worst estimates are now just average, market signals to grow more pork are being ignored and meat imports are skyrocketing.
By Eric J. Brooks
An eFeedLink Hot Topic
It has been eight months since China's African Swine Fever (ASF) epidemic broke out and authorities are nowhere near getting it under control. Denting pork production more than its consumption, China's meat import volume is rising 15% this year. Possibly killing more pigs than the combined swine populations of top pork exporting nations, ASF's supply shock is now affecting the international agribusiness economy.
The island province of Hainan notwithstanding, mainland China's provinces and regions have been hit by ASF and continue to do so. According to eFeedLink's March 2019 Livestock Tracker, "In early March, China's government declared the ASF epidemic under control but no one in the industry itself took Beijing's declaration seriously." Unofficial reports of mass hog cullings, sow slaughter and premature releases to market implied that ten to twenty times as many pigs had been infected than Beijing's official count of slightly over a million head (as of early Q2 2019).
Many farms opted to pull forward their release of ASF-infested hog herds and get full market value rather than report ASF cases and be compensated by the government, which covered less than two-thirds of hog production costs.
Shortly after Beijing declared the epidemic under control, eFeedLink's Livestock Tracker reported "During mid-March, Sun Dawu, President of the Board of Directors of Hebei Dawu Group posted a blog article claiming that its new breeder farm has lost 15,000 head within a short period and another 5,600 hogs were culled due to the ASF outbreak. Sun also claimed that someone in the industry had told him that 20 million heads of sow have died, which was over half of China's sow population of 38 million head."
Then on, April 16th, Reuters reported that Beijing had reversed itself, stating that "China will allow large-scale pig farms and breeding farms to test for African swine fever in a bid to help early detection of the disease, overturning an earlier prohibition on commercial firms carrying out their own testing." Reuters added that rather than the official number of slightly over a million, total ASF-induced mortality and cullings could total as high 200 million hogs –that is more than the entire swine inventories of America, Canada, Brazil, Germany and Spain combined!
The gravity of the situation is captured in recently revised USDA estimates –which are not based on the most recent, worst case reports. From a USDA estimated 441.6 million head at the start of 2018, China's hog inventory entered 2019 at 428.1 million head –but will suffer a whopping, cumulative 21% or 91.6 million head decline, to 350 million head by the start of 2020.
Fewer pigs invariably mean less pork: Less than two months ago in our last ASF update, we declared the USDA forecast of 54 million tonnes of 2019 pork production and 1.88 million tonnes of imports as too conservative. We forecast 50 million tonnes of Chinese pork output and 2.2 million tonnes of imports.
In the past week, the USDA was forced to revise its forecast down to 48.5 million tonnes of Chinese pork production with imports of 2.2 million tonnes. In a nutshell, pork production is falling to its lowest level in 10 years but consumption is falling to 50.4 million tonnes, which is its lowest level in five years. At this point, we consider 48 million tonnes of pork production, 50.5 million tonnes of pork consumption and a record 2.5 million tonnes of Chinese pork imports a more realistic forecast –though this too may soon be revised.
One of the reasons we are calling this a "worst case scenario" is because China's swine sector is now incapable of responding to capitalist market price signals to grow more pork. Whereas the month after Chinese New Year is usually a deflationary time, March saw China's average live hog price jumped a whopping 25%, from RMB12.05/kg (US$1.80/kg) to RMB15.10/kg (US$2.26/kg) –up approximately 50% from March 2018 levels. Post-Lunar New Year meat consumption plunged as expected, but pork production fell by an even greater amount.
--Less than 3 weeks later at the time of this article's publication in mid-April, Chinese live hogs jumped to RMB16.00/kg (US$2.39/kg). The industry consensus is that they will probably set a new price record near RMB25.00/kg (US$3.74/kg) later in the year –but with no corresponding supply-side upturn!
--On one hand, eFeedLink's March Livestock Tracker reports that "Large-scale hog farms with breeding sows enjoyed an RMB1.42/kg profit (US$.21/kg), improving prominently from February's loss of -RMB1.17/kg. (-0.17/kg)"
Similarly "After running losses for most of the last two years, backyard farms made a substantial profit of RMB0.81/kg (US$0.12./kg). This was a sharp turnaround from February's steep -RMB2.04/kg (-US$0.31/kg) loss."
Going forward, it projects that in April, large scale hog farms will enjoy an RMB2.62/kg (US$0.39/kg) profit margin while backyard farms will earn RMB2.25/kg (US$0.0.34/kg) respectively.
--On the other hand, these massive swine price increases and high profitability will fail to boost pork production, much less stop it from declining over the medium term.
March saw piglet prices soar 25% from RMB24/kg to RMB32/kg (US$3.59-4.78/kg), but swine herds cannot be replenished at any price for the foreseeable future: Breaking out after when the industry had already endured nearly two years of heavy losses, ASF accelerated a mass sow culling trend that was already underway.
From a peak of 50 million head in 2014, heavy net losses had already reduced China's sow herd to 30 million head when ASF broke out. Since then, the USDA reports that it fell by another 19% to approximately 25 million head in February, with further reductions towards the 20 million head level expected.
At this point, no matter what level hog prices and profits rise to, it will take several years to first rebuild China's sow herd and subsequently replenish plunging swine inventories. Rather than stimulating the immediate production of additional pork, high hog prices stimulated the production of other meat lines while drawing in imports.
For example, whereas broiler inventories usually fall in the months after Chinese New year, Q1 saw them rise by 5.4%. Whereas late Q1 is usually a time livestock prices fall, broilers jumped from an early Q1 bottom of RMB8.00/kg to 11.00/kg by early April.
This is 35% to 40% above the broiler price of April 2018, as Chinese consumers substituted chicken in place of increasingly scarce, expensive pork. Eager to capitalize on chicken's replacement of pork, Chinese farmers bid up AA chick prices to 208% above March 2018 levels.
The resulting higher poultry demand and broiler rearing returns forced in this year's initially projected 2.6% 300,000-tonne rise in broiler meat production to 12.0 million tonnes to be revised upward to an 8.1% 950,000-tonne increase to 12.65 million tonnes. Even so, high chick replenishment costs will hold back broiler meat production and make additional imports of chicken necessary.
Similarly, eggs had a very short spell of post-Lunar New Year deflation but were selling higher than the pre-Chinese New Year level of RMB7.00/kg (US$1.05/kg) by early April. Even though egg demand was mildly stimulated by high pork prices, layer farmers slaughtered older birds when pork price inflation boosted broiler selling prices.
With egg supplies falling just as consumers began substituting them in place of expensive pork, their price rebounded back to highs usually seen just before Chinese New Year. This is expected to cause egg production to grow at above-average rates in H2 2019.
Ironically, ASF-induced price inflation is stimulating additional production of other Chinese protein lines while leaving swine farming in a catatonic state, unable to respond to its own price signals. At the same time, ASF's supply shock is reverberating far beyond China's border's. Owning half the world's hogs and eating 50% of its pork, swine meat accounts for approximately two-thirds of Chinese meat consumption.
Hence, this steep 25% decline in Chinese swine numbers and inability to respond to price inflation cannot stimulate enough production of poultry and other meats to fully substitute for a growing domestic pork supply shortfall. Already the world's leading meat importer, ASF carries severe consequences for both China and the entire world.
Instead of rising 1.3% from 113.1 to 114.6 million tonnes as initially forecast by the USDA, world pork production is now projected to fall 4.1%, to 108.5 million tonnes. Because the pork production of exporting countries not rising by enough to bridge China's 2.5 million tonne pork supply-demand gap, all types of meat imports are rising rapidly.
With pork's high cost closing its price gap with beef, wealthier Chinese are substituting more of the latter into their diets. As a result, beef imports greatly exceeded their USDA 1.2 million tonne forecast for 2018, rising 50.6% to 1.47 million tonnes. For 2019, the world's top beef importer will boost its purchases another 14.5%, to a record 1.68 million tonnes –far higher than the 1.32 million tonnes of beef imports initially forecast for this year.
--But most Chinese will opt to substitute poultry in place of pork. Unfortunately, with AA grandparent stock imports from America currently prohibited, China cannot boost chicken output as quickly as consumers are substituting poultry in place of pork. Despite the projected 8.1% rise in broiler meat production, chicken meat import volumes are rising 68%, from 342,000 tonnes in 2018 to a USDA revised 575,000 tonnes.
China is already the world's largest importer of beef and pork. ASF has accelerated this trend towards import dependence and will make it the fifth largest chicken importer by 2020. With US meat subject to high tariffs and Australian and New Zealand red meat production faltering, Brazil, Argentina and Uruguay will collectively supply 70% of China's 2019 meat imports, with Brazil accounting for over half this sum.
Most of the remaining 30% consists of pork imported from EU states including Germany, Spain and Denmark. Despite heavy import tariffs, China's pork shortage also forced it to import up to 50,000 tonnes of US pork in Q1, though that import trend depends on ongoing trade negotiations.
One thing is for sure: China had a plan to liberalize corn prices and substitute feed grain imports in place of meat imports, which have been skyrocketing ever since 2015. With pork accounting for over 55% of Chinese meat production and 40+kg of per capita consumption, the ASF outbreak effectively scuttles this plan.
We expect ASF-induced mortality and culling to impact Chinese feed demand and feed crop imports, keeping them at lower-than-expected levels. At the same time, the resulting plunge in pork production means that imports of red meat and possibly even chicken will continue skyrocketing into the early 2020s.
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.