The world’s largest producer of pork is experiencing a historical downsizing of its hog herd. China has been culling hogs to the tune of nearly 100 million hogs and 10 million in its breeding herd over a two-year span, reports Rabobank Food & Agribusiness Research in a recently released report, “China’s Incredible Shrinking Hog Herd.” That’s a total that is equivalent to the United States’, Canada’s and Mexico’s hog inventory combined (see figure below).
China is not only the largest pork producer worldwide, but also the largest consumer of pork. Three-quarters of the meat consumed by Chinese consumers is pork, making China the global driver of pork consumption. For many decades, the Chinese government has invested enormous amounts of cash in building its pork sector in order to keep up with the rise in domestic pork consumption.
Nevertheless, William Sawyer, vice president of animal protein research for Rabobank Food & Agribusiness Research, explains, “the last five years have not been kind to China’s hog sector. We see this as a good lesson that is coming to the Chinese pork industry.”
Third largest decline
This third-largest decline in China’s hog inventory is merely about economics. The Chinese government’s grain policy pushes the cost of corn over $9 per bushel, making grain too costly as a feed ingredient and the business unprofitable for most Chinese hog farmers. Last year, the average producer suffered a full year in the red financially, losing approximately $26 per head, according to the U.S. Meat Export Federation. As a result, millions of hog farmers in China are leaving the industry.
As stated by the Chinese Minister of Agriculture Han Changfu at the annual Chinese People’s Political Consultative Conference this past March, the majority of the pork producers in China, approximately 60 million, only own five pigs. In fact, hog farms with 500 pigs or more account for 38.5% of production. Sawyer points out that most of the Chinese hog farmers exiting the industry are small, backyard operations, which in the long term should improve the efficiency of the Chinese pork sector.
For now, the hog supplies in China will be tight. The major downswing in Chinese pork production became really evident in the first half of this year with a decline of 1.3 million metric tons. Looking at the figures, Rabobank estimates China’s total pork production for this year will equal 53 million metric tons, declining 6.5%. The drastic 20% downsize in the Chinese breeding herd and limiting profit margin for the nation’s hog farmers will make it difficult for the industry to recover overnight.
The slow economic growth in China has also yielded sluggish pork consumption. In the spring, domestic supply of pork in China has dropped below demand, fueling an increase of pork prices. As Chinese consumers adjust to economic downturn, higher domestic pork prices will be matched with lower consumption levels, and many will trade down for chicken. However, human deaths from exposures to avian influenza in the past three years in China have been a bad trend for poultry consumption — a factor that benefits pork. In fact, Sawyer says, at one time poultry was expected to take shares from pork, but so far that has not materialized.
All the same, Rabobank estimates Chinese pork consumption to reach 55 million metric tons by the end of this year. Since China accounts for 49% of the global pork production and 52% of global consumption in 2014, a small shift can have a large impact on the global marketplace, Rabobank notes.
Still, Sawyer says this is a positive for the U.S. pork industry. Efficient pork production in the United States certainly gives the sector a competitive edge, especially with porcine epidemic diarrhea virus now somewhat in the past and supplies rebounding. He explains, “The spread of pork prices between United States, EU and Canada are so far from where they are in China. There is a huge opportunity for the U.S. to send them significant volume in the next six to 10 months.” (See figure below)
According to the Rabobank team’s estimates, the quickest the Chinese pork sector can recover is the second half of 2016, with the sow inventory anticipated to reach its lowest point during the third quarter of 2015. The reduction in domestic pork production will leave room for an increase in pork imports. The rising pork prices domestically open the door for U.S., EU and Canada. Rabobank forecast China’s pork imports at 1.9 million tons or a 45% increase over last year.
For the U.S. pork industry, importing product to China will be challenging. Sawyer says the United States will have hurdles and strategies in approaching the Chinese market. The import snags for U.S. pork are a reflection of the Chinese government’s policy tactics.
Currency is definitely a headwind for the U.S. meat exports in general. The U.S. dollar is already at multi-year highs against the currencies of many major trading partners and competitors. The Aug. 11 announcement of the largest devaluation of China’s currency in over 20 years sent up red flags. The People’s Bank of China’s devaluation of the Chinese yuan by 1.9% was followed by the yuan being further devalued by 3.0% to 4.5% against the euro and the U.S. and Canadian dollars. Still, Sawyer says it is important to put it all into perspective. “Remember, 12 months ago we were seeing all-time-high pork prices. At some point through the year we have been at half of what they were in 2014. So, you put the variables of domestic prices and currency together, pork prices in China are still 60% higher than here in the U.S.,” Sawyer explains.
Although a strong U.S. dollar is slowing the pace of meat exports, the actual hurdle in China is access. Even though the efficiency-enhancing beta-agonist ractopamine has been proven effective and safe for pork production by the U.S. Food and Drug Administration, China continues to enforce its ban on products that contain it. Market participants will continue to debate whether this ban is fear-driven by a long history of feed additive abuses by Chinese food manufacturers or a trade barrier in disguise. The fact remains only a handful of U.S. plants are approved for importing pork into China.
Cultivating new opportunities
Be that as it may, obstacles can mean cultivating new opportunities and strategies. Sawyer says some U.S. hog farmers and pork processors have embraced the request, with 20% to 30% of the U.S. hog herd now ractopamine-free. If China is asking for ractopamine-free pork, then U.S. producers are stepping up and committing to producing products that meet customers’ specifications. Today, the leading China-approved U.S. supplier is Smithfield Foods. The company dedicates half of its production to ractopamine-free pork, a commitment made over five years ago.
Nevertheless, some packers have found it difficult to pass China’s sensitive “test” for ractopamine-free pork when processing both ractopamine-free and ractopamine-fed pigs in the same plant. Smithfield reduces its risk by having three dedicated plants that exclusively handle ractopamine-free pork. Still, over 15 pork processing plants are ineligible to export to China, accounting for 40% to 50% of the U.S. pork production.
However, Steve Meyer, vice president, pork analysis of Express Markets Inc. Analytics, points out that beyond the packers’ challenges, producers declining to use ractopamine will leave dollars on the table. Depending on the source, the estimated value is $4 to $2 per head. In addition, hog farmers will have to make sure the plant will not cross-contaminate during processing to avoid rejection from the customer and secure a high enough price to pay for the loss in feed efficiency.
Dermot Hayes, Iowa State University agriculture economist, calculated that a 1,000 metric ton increase in monthly shipments to China translates to a 55-cent per hundredweight increase in U.S. hog prices, or about $1.10 per head. Meyers says since March 2014, the year-over-year decline in U.S. pork exports to China has penciled to 10,000 metric tons. By Hayes’ calculations, that adds $11 per head.
Still, Chinese consumers see U.S. pork as a safe, premium product — an opportunity that some U.S. companies are capturing. Sawyer says it has been interesting to watch the evolution of Smithfield’s marketing of U.S. pork in China. The U.S. business, owned by Chinese company WH Group, is now shipping fresh pork to China and selling it in its kiosk and grocery store with the label featuring the Smithfield brand next to the U.S. origin of the product.
Just the same, the EU and Canada also will be contending to supply China with pork. Realistically, the EU is in the best position to meet the increased pork import demand from China as its main supplier, Sawyer notes. The further increase in U.S. dollar value against major meat-exporting competitors will continue to build barriers. The USMEF reports the Chinese currency devaluation, coupled with higher Chinese pork prices, creates a record price spread for the EU and increases its suppliers’ chance to dominant the share of China’s import market.
Since only a small number of U.S. pork plants are currently eligible to serve China, the devaluation of the yuan will not necessarily affect direct meat trade with China, says Joel Haggard, USMEF senior vice president for the Asia Pacific. Besides, the EU pork sector has enough pork raised without beta-agonists at a more competitive price compared to the United States. Moreover, the EU has increased pork production while domestic consumption has remained flat, leaving plenty of pork to export. Canada, similar to the United States, also has to deal with the ractopamine-free requirements of the Chinese; however, its dollar has weakened against the U.S. dollar. The Rabobank expects Canada to increase its pork exports to China by about 50,000 metric tons this year.
China’s pork imports rising
Despite the predicted decline in pork consumption by the Chinese this year, Rabobank estimates pork imports will increase 1.9 million metric tons, or 45% higher than 2014. Currently, Sawyer says there is enough volume of ractopamine-free pork being produced in the U.S. to fill the short-term gap in Chinese pork production. Rabobank calculates that only about 20% of the U.S. ractopamine-free pork production is actually being exported to markets that require it. He says that leaves 2 million to 2.5 million metric tons available to fill the growing China import market.
In spite of the volatility in the Chinese market in the last five years, volume of imports has either risen or remained flat. “This is a good indication that the Chinese consumer is getting quite comfortable with pork imported from EU or North America,” Sawyer says. “We have expectation of a big increase in Chinese pork imports this year. We think those big volumes will stay in the long term, even if prices normalize from here, because that distribution channel is getting better and supplying reliable, safe product.”
Overall, the export market is an attractive opportunity for those hog farmers and pork processors who are willing to deliver the product that meets the explicit requirements of customers at a competitive price.
Will Sawyer, Rabobank, says the last five years have not been kind to China’s hog sector.
Over a two-year span, Chinese hog farmers have culled nearly 100 million head and 10 million in the breeding herd, an amount equivalent to North America’s hog inventory.