July 25, 2019

It's not just African Swine Fever! How ten years of setbacks derailed China's feed and livestock boom

Animal diseases and food safety scandals have devastated one formerly fast-growing Chinese protein line after another –and none has yet recovered to previous output levels or grown at rates once taken for granted.

By Eric J. Brooks

An eFeedLink Hot topic

The ongoing African Swine Fever (ASF) epidemic is Chinese agribusiness's most severe crisis to date but hardly the first of its kind. Long before A ten-year succession of food safety problems and uncontrollable animal disease outbreaks had already halted the growth of its once rapidly expanding dairy, poultry and shrimp sectors. Pork is merely the latest and largest livestock line to fall victim to intractable circumstances.

For now, the entire world economy cannot supply sufficient meat –let alone pork– to make up for an ongoing 125 million head decline in Chinese hog inventories. This equals the combined hog inventories of America, Canada and Brazil.

A 15 million tonne decline in pork output can only stimulate at most an increase in meat imports of less than two million tonnes. Domestic chicken and farmed seafood production are expected to increase by a million tonnes each at most.

While China's government reports that H1 2019 pork output only fell 5.5% on-year, this reflects the exceptionally high slaughter rates, associated with serious disease outbreaks: Many farmers rushed immature (and even disease afflicted) hogs to market to avoid suffering even greater ASF-related losses.

Compared to official pork production figures, feed production statistics tell a far darker story. Complete feed accounts for 42% of hog feed consumption. Shi Tao, eFeedLink's Shanghai-based senior analyst states "In June 2019, nine (out of 22) provinces slashed the output of complete hog feed by more than 50% compared with June 2018. The output of another nine provinces decreased by more than 20%. Total complete hog feed output fell by 32.4% year-on-year."

Premixes account for 32% of hog feed. Shi reports that "nine provinces [out of 22] have slashed hog feed output by more than 50% compared with June 2018. Another 11 provinces decreased by more than 20%, making for a total monthly nation-wide output decline of 31% compared to June 2018.

At 26% feed concentrates account for 26% of hog feed consumption. With output in fifteen provinces falling by more than 20%, their overall national output decreased by 25.74%.

These steep falls in hog feed output agree with eFeedLink's July 2019 Livestock Tracker, which stated "Since peaking at 492 million head in January, African Swine Fever mortality and culling slashed inventories 7.1%. Expect an additional ASF-induced inventory fall of 20% to 25% from current levels before they stabilize."

With June 2019's overall hog feed output falling by 30% compared to the same month of 2018 and hog inventories still in a free fall, there is no way a pork production decline of fewer than 12 million tonnes or 20% can be avoided.

For feed production across all livestock lines and aquatic species, June 2019 output was 9.2% lower than that of June 2018. By December, Shi expects China's hog feed output to be 58.6% below the same month of 2018.

For 2019, Shi expects total Chinese feed output to fall by 11.5%. Based on Alltech's Global Feed Survey estimates, that would make 2018's 187.9 million tonnes output drop to 166.3 million tonnes this year. –That could make China the world's second-largest feed producer and America the largest for the first time since 2010.

Alongside swine feed's projected 38%+, 30 million tonne output fall to around 50 million tonnes, layer feed production is expected to fall 2.6%. It will decline from an Alltech estimated 26.8 million tonnes in 2018 to 26.1 million tonnes this year. This is mainly due to high broiler prices, which are motivating the early culling of aging hens and reducing inventories.

To a certain extent, this swine-induced decline in feed production is being partly offset by higher output of other feed types. With consumers substituting poultry meat and fish in place of increasingly expensive pork, broiler and duck feed output are rising an eFeedLink estimated 13.1% or 7.1 million tonnes.

Based on Alltech Global Feed Survey statistics, this will boost broiler and duck feed production to 61.3 million tonnes. Similarly, aqua feed output is rising for the first time since 2013 and will increase 14.0%, to 17.9 million tonnes.

Both broiler feed output and broiler production are rising for two reasons. First to accommodate an 8.1% increase in broiler output to 12.65 million tonnes, the highest chicken meat output level since 2015.

Second, ever since China banned the importation of AA grandparent stock from top supplying nations such as America and France, feed-inefficient native broilers have gone from 18% of all broiler inventories five years ago to over 50% today. This substitution of less efficient native breeds results in broiler feed production rising faster than the chicken meat output.

With pork accounting for 40kg of China's 60kg per capita meat consumption, the steep fall in hog inventories greatly accelerated a long-standing trend for feed mills to close operations. Whereas this formerly affected smaller scale mills, ASF's impact is causing even larger, foreign-owned operators to shut down facilities.

In mid-July Reuters report "Cargill announced that they are closing several feed mills that they operate in that country and state they have no plans ever to reopen them. " In H1 2019 three Cargill's mills were permanently closed and represent a 150,00 tonne or 10% reduction in Cargill's 1.48 million tonnes annual feed output capacity. From over 40 mills a few years ago, Cargill now has 33.

Cargill is actually symptomatic of a much larger trend affecting many domestic Chinese feed mills. eFeedLink's Shi reports that in the first half of 2019, 163 Chinese feed mills ceased operations. Several hundred more can be expected to do so by the end of this year, most of them permanently.

Seen in a broader perspective, ASF is the capstone on a decade of painful changes where one protein line after another fell victim to uncontrollable animal diseases, food safety scandals or both of the above. In each case, the protein line's growth halted and production never exceeded output records set five to ten years ago.

It wasn't always this way. From less than 4 million tonnes in 1980, China's swine-dominated feed output grew exponentially to 23.8 million tonnes in 1990, tripled to 74.3 million tonnes in 2000 and more than doubled to 162.5 million tonnes by 2010, with everyone expecting output to be somewhere in the 250 to 300 million tonne range by 2020 –but that never happened.

According to Alltech's Global Feed Survey, output peaked at 198.3 million tonnes in 2012 and has stagnated in the 180 to 189 million tonne range ever since. Throughout this time Chinese incomes have continued to grow. Rapid growth in imports of meat, seafood and dairy goods implies that China's agribusiness woes are deeply rooted supply-side problems that go back a decade.

Dairy was the most rapidly growing livestock line and the first one to falter. Milk output expanded 10% annually in the fifteen years up to 2012 and at a 15% average rate from 1997 through 2007. 

Dairy's momentum was severely disrupted after 2008 when the toxic plastic melamine was discovered being used to disguise the watering down of fresh milk. In the years that followed, over a dozen additional scandals involving melamine contamination and other banned substances destroyed consumer confidence and impacted investment. Consequently, milk output has leveled off in the 31 to 33 million tonne range and shown no growth since 2012.

Similarly, shrimp was the brightest star in China's vast aquaculture sector, expanding 19% annually in the fifteen years up to 2012. Thereafter, unsustainable biowaste accumulation rendered many Chinese shrimp ponds unusable. This triggered severe shrimp disease outbreaks that have not been brought under control.

From a peak of 1.4 million tonnes in 2010, output fell to near 500,000 tonnes and never recovered. In less than ten years caused China to turn from the world's second-largest shrimp exporter to its largest importer. Uncontrollable disease outbreaks constrained the output of shrimp and other value-added aquatic species. In many cases, diseases could only be controlled by using antibiotics or other additives at high levels that got China's seafood exports banned from world markets.

This caused China's once rapidly aquaculture output to rise by no more than 2% annually or suffer outright declines in recent years. Aqua feed output fell from an Alltech estimated 23.0 million tonnes in 2013 to 15.7 million tonnes last year.

Chicken was the next livestock line to fall to a succession of disease outbreaks and food safety issues. At first, due to food safety scandals involving antibiotic overuse, illegal additives and the approval of stale chicken for human consumption, output growth halted. It peaked at 13.86 million tonnes in 2012 after the first of these food safety scandals broke out late that year.

Thereafter, the years 2013 through 2019 saw nearly a dozen bird flu outbreaks. On several occasions, these forced the culling of up to 25% of China's broiler flock and resulted in hundreds of human bird flu deaths. Hence, both chicken meat's supply and consumption were badly impacted.

In an attempt to get avian influenza under control, China banned AA grandparent stock imports from the US and many European supplier companies. That forced China to rely on slower growing, feed-inefficient native broilers for up to half its chicken meat, which further depressed output. Even with an ASF-induced pork shortage stimulating broiler output growth of 8.1% in 2019, output remains 9% below its 2012 peak of 13.86 million tonnes.

Poultry was not the only struggling mainstream meat line. Even before ASF hit, China's swine sector was having severe problems. From 2007 onwards, several serious disease outbreaks constrained output, though none on a scale comparable to the current ASF epidemic.

Moreover, China's government placates its urban majority population by keeping pork prices artificially low on occasions like the Mid-Autumn Festival or Chinese New Year, which traditionally accounted for a large proportion of annual hog farming profits. At the same time, it pursued feed grain self-sufficiency by keeping Chinese corn 100% more expensive than world prices. 

The resulting combination of artificially high hog feed costs and low pork selling prices decimated hog farming earning and undermined the incentive to expand production. The situation was made worse by hog disease epidemics that broke out in the mid-2010s. Thus, after peaking at 58 million tonnes in 2014, pork output slumped into the 54 million range that had been exceeded in 2012.

–China's government was attempting to "fix the problem" by gradually liberalizing its corn market when ASF hit, creating a problem of catastrophic proportions: Prior to the ASF outbreaks, China owned 50% of the world's pigs.

Chinese culture is far more attached to eating pork than American culture is to eating beef. At 40kg, China's pre-ASF per capita pork consumption is 73% more than the 23kg eaten by Americans. It even exceeds the 25kg of beef eaten per capita by Americans. Pork accounted for 67% of China's meat consumption, swine for 50% of its feed demand.

But the disaster caused by ASF extends far beyond China's swine sector or even the world market for pork. Long before ASF hit, one Chinese protein line after another had fallen victim to uncontrollable disease outbreaks, food safety scandals and import dependence –with deep interlinks between the three.

Unsanitary animal growing conditions caused disease outbreaks and motivated farmers to overuse antibiotics or banned substances. Domestic production would then falter and consumers shun the local product, creating growing dependence on imports of pork, chicken, shrimp and dairy products.

Moreover, government policies designed to promote corn self-sufficiency forced the use of mycotoxin contaminated corn that weakened animal immune systems, damaged fertility and resulted in lower finishing weights.

Similarly, while ASF's entry into China overland from Russia was probably inevitable, the epidemic made worse by official policies that made it profitable to not report ASF cases and send diseased pigs to market.

In conclusion, ASF is merely the most severe symptom of a much larger problem: China's chronic, decade long agribusiness crisis is not so much due to unfortunate microbial outbreaks, illegal farm animal farming methods or government policies but an entire livestock farming paradigm.

The fact no other developed or developing country faces comparable non-stop disease-and-scandal driven constraints on its meat output implies that this problem is rooted in China's approach to livestock farming.

Chuck Warta, president of Cargill's animal nutrition and pre-mix business implied that ASF is about more than China's pig population. He said "This is not a six-month trend for China to recover. This is a 24-month, 36-month kind of resetting of the world's population of animals [not just pigs]"  --and it will require a complete restructuring of how China undertakes animal protein production.

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