The U.S. pork industry is at a crossroads, "and like it or not, but China holds a lot of our collective fate right now," Brett Stuart, co-founder and CEO of Global AgriTrends, told a number of lenders and swine producers during a webinar sponsored by Minnesota Pork Tuesday.

Two biologic "black swan" events have converged to put the country's swine sector maybe more in the crosshairs than at a crossroads. COVID-19 maybe be grabbing the headlines since late last year, but the ill effects of African swine fever started being a market factor when it was first reported in August 2018. Since it hit in China, ASF has decimated "roughly one-third of all hogs in the world, which is incredible and is still raging," he says.

Taking a look at the ASF situation in the world, Stuart spelled out for the lenders tuning in to the session that the virus has become a game-changer for the industry. It does not harm people, but the hardy virus is lethal for hogs, and there is no vaccine.

"Now add this to it," Stuart says. "Seventy-five percent of the world's hogs are now threatened between Europe and Asia. Chinese pork supplies equate to 20% of the global proteins. All of the meat and poultry on earth, China pork is 20% of that. So anything that affects Chinese pork is going to affect all of the global protein markets. And the losses mainly in China are absolutely massive."

Trying to get an accurate head count loss in China can prove difficult, and the sheer numbers, accurate or not can seem daunting to U.S. producers, who care for roughly 6 million sows today. Stuart says estimates are that China had a sow herd in 2018, prior to ASF, of about 40 million sows. He points to numbers used by the Chinese government "which I think are heavily, heavily understating the loss. … they're claiming that they lost near 18 million sows in 2019. I think they lost far more than that."

Now on the road to recovery, Stuart says the Chinese hog industry plans to add 14 million sows this year. "Now, again, that is almost three times the size of the entire U.S. swine sector that they're claiming they're going to add in one year. That's pretty tough to do," he says. That road to recovery will more than likely hit large potholes since the country is still fighting ASF.

Stuart says the large commercial hog operations in China "have learned to work around ASF, but they're less than 20% of production. In fact, the top 12 companies in China are only about 12% of production. So the vast majority of China's hogs are still on small farms."

If China loses 60% of its swine, which Stuart's firm estimates, a supply gap of 24 million tons of pork is created. Putting that into perspective, he says that all of the pork traded in the world comes in at about 8 million tons.

That creates a problem for the Chinese who crave pork, and he says that nothing will fill that gap in the Chinese diet. "They're just eating way less pork. They're eating vegetables …They got a little more beef, a little more chicken, but pork was their main protein."

Why is this significant?

"Chinese hog prices are going to stay very high for a very long time until that gap can be filled," he says. Last week Chinese hogs were 37.5 renminbi per kilo. "That means about $3.26 a pound on carcass weight. U.S. hogs are about 58 cents. So you can see the math there, right? Chinese hogs are five times the price of U.S. hogs. In fact, if we put U.S. hogs into RMB at 58 bucks, they'd be about 6.7 RMB on a live weight basis."

With that imbalance, China should be a huge market for U.S. pork and the market prices received by U.S. producers should reflect the ASF damage in China. China has been buying U.S. pork, going from buying 1% to 2% of U.S. production to buying 14%; they are now buying around 5% of production. "The problem is we expanded a little bit more than that," he says. "Even with that huge buying, the Chinese have managed this perfectly. They have controlled who can buy U.S. pork. State-owned enterprises are given preferential treatment. And so those state-owned companies come and order U.S. pork, and they buy just enough that they do not raise the prices in the U.S. … If China hadn't been there, it would have been far more apocalyptic in the pork sector."

Stuart says China can and should be buying more U.S. pork, but "cans" and "shoulds" don't translate into sales. Being "this" dependent on the Chinese puts the United States in a tough spot. "It's not a problem to be dependent on exports. We have a very diverse export market. It's tough to be dependent on China," he says.

While China is home to 50% of all hogs in the world, western Europe is home to 25% of the world's hogs. As stated before, the Chinese herd has been decimated by ASF, but the virus has yet to hit western European commercial farms, though eastern Europe as had its ASF problems. "They did find some positive wild boars in Belgium, but the Belgians over the last year have pretty much stamped it out. That's one of the few successes we've ever seen. Once it's in a wild boar herd, it is incredibly difficult to contain or stop. Wild boars do not respect national boundaries, and Europe has a lot of wild boars," Stuart says.

And then came COVID-19 …
U.S. pig farmers are well aware of the negative impact the COVID-19 pandemic has had on the industry — from the closing of schools, restaurants and foodservice, to the human health impact of slaughterhouses and processing plants being forced to shut down or at least slow down production.

Stuart points to three key impacts from COVID-19.

Consumers shifted from restaurants and foodservice to retail. As an example, U.S. foodservice traffic fell by 43% in April alone. "When people shop in grocery stores, they're way more responsible than when they eat at restaurants," Stuart says, "they eat way less bacon, butter, cheese, way less steak. You go to the grocery store to shop, and we say, what am I going to cook? I know how to cook hamburgers. Boom, hamburger demand goes through the roof. Even things like pork loins we saw go sharply higher. It's a very different mentality of how you purchase and consume food."

This picture is painted clearly when looking at a chart showing U.S. retail and foodservice spending. Over the last four years the spending in the two sectors had stayed fairly close, even crossing from time to time, and then COVID-19 hit. Foodservice sales dropped through the floor, plunging to about $30 billion, while retail sales spiked to the low-$80 billion area. Both sectors have since reversed that course some, but Stuart says he is "not sure when this will ever get back to normal, if the two lines will ever converge, at least not anytime soon."

Slaughter plant closures and slow downs obviously had a large impact, an impact that lingers, on the industry. "We have now had over 18,000 meat plant workers test positive for COVID in the U.S.," he says. "We found out real quickly, the weak link in the chain is our dependence on human labor. When people don't show up to the plant, the trucks all show up full of hogs and start unloading. If you don't have people to cut them up, you're in big trouble. It crippled production. We had over 45% of our hog packing capacity close for weeks back in May, so we backed up hogs."

While there's disparity in how big the estimates of backlogged hogs is, Stuart says whether it's 1 million, 2 million or 4 million, there are still hogs backed up. "I don't think we have 4 million backed up, but we just have no idea how big that backlog is," he says, "and as long as there are more hogs than shackle spaces, the leverage is against the producer. The producers calling the packer every week going 'I need to get more hogs gone.' And the packer is going 'uh, we're pretty booked, but we can pay a small price to get some.' And so this makes it very tough on margins."

The third key COVID-19 impact is the basic economics concerns. "We don't know if we're in a 10-year recession or a one-year recession, who knows where we're at," he says.

The bottom line, as Stuart sees it, is that U.S. pig farmers are too good at what they do, and they are just raising too many pigs, and he says the industry needs to contract. "This happening now, but will it be enough?" he asks. "Hog margins will be difficult until right-sizing occurs. … Into 2021, chances are to see some good margins come back, but we have to get from here to there."