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COMMENTARY & ANALYSIS

August 9, 2019

Bad but could be worse: African Swine Fever spreads into Vietnam
 
China's southern neighbor is now experiencing ASF deaths and mass swine cullings. Domestic meat lines, feed output are all impacted, as are imports of meat and feed crops. Recovery is expected to be quicker and easier than it will be for China but a pork import trend could also be starting.
 
By Eric J. Brooks

An eFeedLink Hot Topic
 
 

While global agribusiness focusses its attention of China's African Swine Fever (ASF) outbreaks, the epidemic has quietly spread into one of Southeast Asia's largest, fastest-growing feed and livestock markets.
 
–As the attached map shows, at this time, a majority of the newest, most recent ASF cases are breaking out in Vietnam, not China. While there are now reports of ASF in Cambodia, Laos and most recently Myanmar, at the present time, it is spreading more rapidly in Vietnam than any other nation.
 
In May, Vietnam's government announced that 1.2 million hogs had died or been culled due to ASF. By mid-June, the number had been revised upward to 2.5 million head. In late July, Rabobank's Q3 Pork Quarterly estimated that as of early Q3 2019, 3.0 million hogs had been lost.
 
Then, in early August, the UN FAO estimated that 3.7 Vietnamese pigs had either died or been culled due to ASF. This is equal to 13.6% of the 27.3 million hog inventory Vietnam had entering 2019.
 
Going forward, Rabobank projects Vietnam's ASF hog losses to total somewhere between 5.5 to 6.8 million head by the end of 2019. That, in turn, will represent a 20% to 25% reduction in the size of Vietnam's hog herd, into the 20.5 to 21.8 million head range by the start of 2020 (21.2 million head is the midpoint estimate).
 
As even much of the pork produced this year will come from underweight pigs, we estimate this will reduce Vietnam's 2019 pork production. From 2018's USDA estimated 2.8 million tonnes, we can expect Vietnam's 2019 pork production to fall to 19.6% to 23.2%, to somewhere between 550,000 and 650,000 tonnes, into the 2.15 to 2.25 million tonne range (2.2 million tonnes and  21% output decline is the midpoint estimate).
 
Assuming inventories bottom out and fall another 5% in 2020, we estimate next year's pork production at around 2.1 million tonnes.
 
As happened earlier in China, massive hog inventory losses have triggered swine price inflation: In the two months since early June, Vietnam's live hog prices have risen by more than 20% and can be expected to increase further. Pork prices have no choice but to rise by a similar amount. The inverse relationship between price and consumption implies that the latter is going to fall.
 
Per capita pork consumption is expected to fall by only 12%, from 28.9kg to 25.8kg. With its population rising 1% yearly, total pork demand will fall 13.0% or 362,000 tonnes, from a USDA estimated 2.786 million tonnes in 2018 to 2.424 million tonnes this year –but this is a whopping 510,000 tonnes below the 2.93 million tonne pork consumption level that had been initially estimated for 2019, which was driven by rising consumer incomes.
 
 – On the other hand, because it is based on rapidly rising consumer spending power, not all of the roughly 600,000 tonne gap between 2019's pre-ASF and post-ASF pork output estimate can be met from imports or destroyed by higher pork prices: With pork costly and in short supply, consumers will use their rising spending power to consume more domestically produced chicken, duck and beef –alongside fast-rising pork import volumes –which had been rising very quickly even before ASF infected Vietnam's swine sector.
Despite being nominally self-sufficient in pork, imports were rising rapidly long before ASF ever struck, due to their lower price and higher meat quality. Based on FAO statistics, from just 3,000 tonnes in 2013, pork imports tripled to 10,000 tonnes in 2016 and jumped to 65,000 tonnes in 2017.
 
2018 pork imports nearly doubled again. They exceeded 120,000 tonnes last year, with the EU reporting that it shipped 79,000 tonnes of this total, nearly double the 41,000 tonnes volume it sold in 2017. Russia was the second-largest source of imports supplying 17,000 tonnes, followed by the US with 16,000 tonnes.
 
With output falling roughly 21% and consumption by 13.1%, rapid import growth is underway. Earlier this year, pork imports were trending upwards even before ASF became a serious problem: From January through April inclusive, import volumes were 60% higher than in the first four months of 2018. Since ASF only started severely impacting Vietnam's swine sector from Q2 onwards, we may conclude that the biggest ASF-linked pork output losses –and import increases– will occur in the second half of this year. A conservative estimate would be for Vietnam's pork imports to exceed 210,000 tonnes.
 
With Vietnamese personal incomes rising strongly this year, not all ASF-induced output losses will be replaced with imported pork. We can expect both the price and domestic production of chicken, duck and eggs to be strongly stimulated, as Vietnamese consumers substitute these cheaper proteins in place of pork.
 
Farmers will take advantage of rising poultry returns while feed mills will be anxious unload feed materials not consumed by pigs on other animal lines. We expect output to increase by more than 10% for the production of chicken meat (11.4%, to 930,000 tonnes), duck meat (11.5%, to 155,000 tonnes) and eggs (+14.8%, 666,000 tonnes). With demand for chicken meat rising by an eFeedLink estimated 13.5%, broiler meat imports can be expected to rise 43%, from 70,000 tonnes in 2018 to 100,000 tonnes this year.
 
On the other hand, as pork becomes more expensive, upmarket consumers may substitute beef in place of pork, as the price differential narrows. This will both stimulate domestic beef production as domestic farmers boost slaughter rates to take advantage of higher demand, and also beef imports. They may rise by 31% or 20,000 tonnes, to a record 85,000 tonnes this year.
 
With the increase in more feed-efficient poultry not fully offsetting a decline in pork production, we can expect production and consumption changes to badly impact Vietnam's feed sector, which has been one of the world's fastest-growing, expanding 11.9% annually from 2011 through 2018, based on Alltech Global Feed Survey figures. At 11.04 million tonnes, we can expect swine feed production to fall 20% or 2.21 million tonnes, to no more than 8.83 million tonnes.
 
On the other hand, the 3.33 million tonnes of feed consumed by broilers, ducks and layers in 2018 can be expected to increase at least 11% or 0.37 million tonnes, to 3.70 million tonnes. To this can be added a 10% or 0.4 million tonne increase in aqua feed consumption and 0.1 million tonne increase in the volume of dairy cattle feed, beef cattle feed and other feeds consumed.
 
With the 2.21 million tonnes drop in swine feed  production partly offset by a 0.87 million tonne rise in the output of other animal feeds, overall feed output appears poised to drop 6.8% or 1.34 million tonnes, from an Alltech estimated 19.63 million tonnes in 2018 to roughly 18.29 million tonnes in 2019, stabilizing near 18.5 million tonnes in 2020. This will put Vietnam's feed output up to several million tonnes behind that of Thailand, Philippines and Indonesia –rival Southeast Asian markets that it looked poised to overtake in feed output.
 
It also impacts Vietnam's feed crop imports, which had been growing rapidly. Corn imports expanded from nothing in 2000-01 to 1.5 million tonnes in 2009-10 and 10.2 million tonnes in 2018-19. Feed production is falling 1.9 million tonnes and up to 45% of its volume is accounted for by corn. Hence, instead of rising to 11.0 million tonnes as initially predicted by the USDA, 2019-20 corn imports appear poised to fall back into the 9.3 to 9.5 million tonne range, before resuming their long-term rapid growth in the early 2020s.
 
Oilseed imports are also impacted, though in a very different way: As of 2018, Vietnam was 20% self-sufficient in soymeal. It imported 4.85 million tonnes of soymeal and also 2.2 million tonnes of beans, which were crushed into roughly 1.2 million tonnes of meal. On one hand, soymeal demand will fall roughly 6.6%, from 6.05 million tonnes in 2018-19 to 5.65 million tonnes this year.
 
On the other hand, with domestic soymeal crushing capacity increasing, bean imports will rise 13.6%, from 2.2 million tonnes to a USDA estimated 2.5 million tonnes this marketing year, with domestic meal output rising to roughly 1.36 million tonnes.
 
On the other hand, with overall soymeal demand falling 0.40 million tonnes, this will reduce estimated 2018-19 soymeal imports by roughly 0.55 million tonnes or 11.3% from 4.85 million tonnes in 2018-19 to 4.30 million tonnes this year.
 
Going forward, we anticipate Vietnam recovering from ASF faster than China. In Vietnam, unlike China, poultry meat consumption never tapered off or declined. This puts it in a better position to substitute poultry in place of swine meat than China, which is coming off years of deadly bird flu epidemics, chicken meat safety scandals, AA grandparent stock shortages and a decade of declining chicken meat consumption.
 
Vietnam also has the advantage of having watched and studied China's response to the ASF epidemic and is thus in a position to make fewer mistakes in controlling ASF and recovering from it.
 
Unlike China which offered a low price for afflicted culled pigs, Vietnam offered compensation well in excess of normal returns almost from the start of the epidemic. It was also quicker to restrict inter-regional swine transport and mobilize its police and armed forces to control it. Within Southeast Asia, smaller more recent outbreaks in the less organized swine sectors of nations like Cambodia, Laos and Myanmar are far more problematic: In the latter nation, peasants have already tossed several thousand dead swine into streams and rivers, promising an easy spread to other regions.
 
Consequently, while Chinese agribusiness will suffer from ASF's effects well into the early 2020s, it is possible that by this time next year, the worst will be over for Vietnam.
 
While Vietnam's medium-term prospects for recovery look far better than China's case, the crisis also brings to the fore long-simmering issues: Pork demand outgrew Vietnam's arable corn-growing land a decade ago. Will ASF cause Vietnamese policymakers to substitute massive import growth in corn and soybeans for straight imports of pork itself? Time will tell.
 


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