January 15, 2020
China and the pork exporting Continent
Stagnant domestic consumption, protectionist feed policies, two disease outbreaks and trade politics turned Europe's swine sector into a China-destined export powerhouse.
By Eric J. Brooks
An eFeedLink Hot Topic
The European Union (EU) is the world pork market's highly paradoxical and most unlikely hero. Spread out over 28 countries and with half of them net pork importers, it inhabits a continent with near zero population growth.
Long stagnant due to falling per capita consumption, EU pork exports more than doubled, from 1.7 million tonnes in 2010 to a USDA estimated 3.65 million tonnes in 2019 and a projected 3.9 million tonnes this year. –Led by Spain, Germany, Denmark and the Netherlands, EU exports to China tripled from slightly over 700,000 tonnes in 2010 to at least 2.2 million tonnes this year –and it did so with output barely 7.8% higher in 2019 than it was in 2010.
--But these statistics actually underrate the true export prowess of individual European nations: These statistics only "count" pork exported from EU countries to non-EU nations. Most of the nations that export to large Asian markets also have a sizable EU export volume.
Top exporter Spain for example, exported approximately 940,000 tonnes to non-EU countries, including 540,000 to China –but it also exported over an additional 1.1 million tonnes of pork to neighboring EU nations including half a million tonnes to France and several hundred thousand tonnes to nearby nations including Italy and Portugal.
Similarly, alongside exporting approximately 900,000 tonnes of pork to Asian nations such as China (500,000 tonnes), South Korea (130,000 tonnes) and Philippines (88,000 tonnes), second-ranked Germany also ships over a million tonnes of pork annually to neighboring European nations such as Italy (343,000 tonnes), Poland (166,000 tonnes), Netherlands (131,000 tonnes) or Austria (111,000 tonnes).
Hence, if both Germany and Spain were not considered part of the integrated EU, the combined EU and non-EU export volumes of both these nations would exceed those of second-ranked pork exporting nation Canada. Similarly, in many years, the combined EU and non-EU exports of Denmark or Netherlands probably exceed those of Brazil.
But inter-European exports represent the first phase of the Continental swine sector's trade development. Since 2010, trade between EU and non-EU nations has grown faster than that with their fellow European countries. While wealthy Japan and South Korea always had a taste for high-end European pork, EU pork found its way to Asia after China instituted a protectionist corn price policy in the late 2000s.
After 2007, China kept feed corn's cost at 50% to 100% higher than the world price, while capping pork prices. From 2007 through 2015, this caused Chinese hog inventories to lag pork consumption, drawing in imports, initially mostly from America.
In 2013 however, the first of two disease outbreaks gave the EU a wide opening into the vast Asian pork import market: America's nasty PEDv epidemic temporarily blocked the export of US pork to China, just as import demand began to take off. This coincided with a 15% to 20% depreciation of the Euro versus the US dollar. As a result, both in China and also in Japan and South Korea, EU pork was substituted in place of PEDv tarnished US pork –and with China's pork consumption now racing several million tonnes ahead of its demand, no market welcomed European pork faster than China.
Hence, the first boom in non-European EU pork exports and their doubling of shipments to China occurred in the mid-2010s. But in 2015 just as European pork exports to Asia were booming, China announced it would let corn prices gradually fall to world levels.
This had a restorative effect on Chinese pork production and for a while, it grew faster than consumption. Consequently, from 1.71 million tonnes in 2010 (with 209,000 tonnes shipped to China), 2015 EU pork exports peaked at 3.13 million tonnes (with 1.89 million tonnes shipped to China).
EU pork exports fell back by 8.7%, back to 2.86 million tonnes. The decline would have been much worse had a steep 28% decline in shipments to China over two years not been counterbalanced by a steady rise in exports to East Asian nations such as South Korea and Japan.
--EU pork exports looked destined to fall as low as 2 million tonnes (and those to China to 500,000 tonnes) when a second disease outbreak changed destiny. A huge, ASF-induced 20 million tonne decline in China's pork production coincided with trade wars that saw China block or impose heavy tariffs on imports from the US and Canada –the world's top two pork exporting nations.
–With nearly 4 million tonnes of North American pork exports blocked by trade disputes, only the combined export volume of EU nations could bridge the supply shortage created by blocking exports of Canadian and US pork. From 1.358 million tonnes in 2018, EU pork exports to China probably totaled 2.25 million tonnes in 2019 and will exceed 2.3 million tonnes in 2020.
For non-European shipments, a handful of nations accounted for approximately 75% of EU shipments. Based on preliminary EU figures, China (46%) and Hong Kong (4.5%) accounted for approximately half of 2019 EU exports, with South Korea (6.0%) and Philippines (5.5%) accounting for the next largest shares.
With higher 2020 exports to China (2.25 million tonnes, +66%) and Japan (0.455 million tonnes, +5%) more than offsetting lower shipments to South Korea (271,500 tonnes, -19%) and Philippines (247,000 tonnes, -13%), EU producers enjoyed a banner year.
With strong Chinese demand and high export prices boosting trade-related returns, total EU pork exports jumped 24.1%, from 2018's 2.94 million tonnes to a USDA estimated 3.65 million tonnes in 2019.
This was significantly higher than the 3.24 million tonnes initially projected before ASF's severity became known. High returns and China's demand also forced the USDA to revise its 2020 EU export forecast from 3.6 million tonnes to 3.9 million, 13.0% more than was shipped in 2019.
Even so, with EU pork production rising by less than 1% annually and leading producers using environmental and animal welfare laws to restrict herd expansion, it was not easy for Europe to supply China with this much pork. The Continent's stagnant, slowly falling per capita pork consumption freed up a few hundred thousand tonnes of pork –the rest made their way to China via classic, free-market price signals.
Aware that the Continent was in a position to supply the greatest share of China's import demand, EU piglet prices hyperinflated from €33/head in Q4 2018 into €50/head to €59/head by mid-2019. After a pause they resumed rising further, to an average of approximately €66/head in early 2020.
Consequently, EU exports to China increased approximately 63% or 647,000 tonnes but overall EU shipments rose only by slightly over half a million tonnes. With the exception of Spain, supply-constrained EU exporters diverted shipments from other European and Asian nations to take advantage of high Chinese prices.
For example, with Denmark's 2019 pork production declining 6%, overall Q1 to Q3 exports were down 10%. –But while shipments to Germany (-31%) and Britain (-12%) fell sharply, Danish pork exports to China more than doubled over this same time.
Similarly, Q1 to Q3 German pork exports were 2% lower in volume terms than they were in 2018 –but export revenues jumped by 10%. This was due to the diverting of German exports to China. It accounted for 10% of German pork shipments or 130,000 tonnes in the first three-quarters of 2018 but 14% or 185,000 tonnes in 2019. This was motivated by China paying over €2.00/kg for pork belly that European importers typically buy for €1.50/kg.
With less EU pork going to Eastern Europe and East Asia, the latter substituted more American and Brazilian pork in its place, thereby giving a boost to New World exports.
ASF's biggest beneficiary, however, was Spain. With production costs up to 40% lower than EU rivals, Spanish pork costs slightly more than supplies from America or Canada but has a reputation for higher quality. And Spain is one of the few European nations that has the capacity to boost production in the face of high demand.
From almost no pork exports 20 years ago, Spain in 2018 was the EU's second-biggest pork supplier to non-EU nations, shipping 870,000 tonnes, compared to Germany's 892,000 tonnes. Together with Denmark (586,000 tonnes), Netherlands (480,000), Poland (253,000) and France (232,000), these four nations supplied over 95% of 2018 EU pork exports to non-European nations.
This year, Spain was the only top three EU exporting nation capable of boosting output. It was able to transform a 2% output increase to an 8% increase in exports, to 940,000 tonnes –and an even larger 21% increase in export revenues, to €3.1 billion. The enhanced profitability was due to a 60%+ increase in shipments to China. They totaled around 540,000 tonnes in 2019.
Moreover, the average price of Spanish pork destined for China has jumped from their 2015 to 2018 average near €1.60/kg to €2.53/kg in early Q4 2019. Cuts such as pork shoulder are being exported by as much as 70% more than in 2018.
With European producers constrained by a variety of factors including low domestic returns, falling domestic consumption and environmental laws restricting their expansion, China's imports of EU pork are likely to level out in the 2.3 to 2.4 million tonne range in 2020.
Moreover, the recent re-opening of China's market to Canadian and US pork means that by this time next year, the quantity of imported pork trying to enter China's market could exceed consumption. This will bring about a 'squeezing out' of some European pork in favor of cheaper Canadian, American or Brazilian supplies. Nevertheless, Europe will remain an export powerhouse. Pork from nations such as Germany, Spain, Netherlands and Denmark will remain a fixture on high-end Chinese dinner tables for many years to come.
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