China’s hog herd is devastated by African swine fever. World hog production and profitability are at all-time highs. What does it all mean for U.S. pork producers? We caught up with Adam Speck, senior commodity market analyst with the IEG Vantage Livestock group, to learn what’s at stake:
How will China replace the pork production it lost from African swine fever?
When China announced that it had ASF, they put the world on notice: Hey, we’re going to need more pork. The question is, where will they get this pork? They will buy from the U.S., but they have other options as well. Right now, China has a much more favorable relationship with the European Union, Brazil and Russia, and all three regions will be up 3% to 4% in hog production this year. The U.S. will be up as much as 5% for the second half.
Does higher production translate to higher profitability?
The futures market is pricing in record profitability over the next 18 months. Record profits made in the past 60 days have almost negated losses from the past six months. China’s herd liquidation is one factor behind U.S. high profitability.
Sow prices in the last 60 days have really spiked. Why? Producers see high prices and have decided not to retire older sows, because they need production. The market is signaling to U.S. producers: “Go full tilt.” I believe we are paying too high a price for pork because there is a fear premium in the market right now. Our higher price point is already shutting out some poorer trade partners who can’t afford our higher prices. This is typical during summer price highs but will also be a factor this fall when U.S. pork prices don’t find the full price dip typical.
How much pork production will China lose from ASF?
We don’t know exactly how many hogs China has right now; the number out of China is whatever the government is willing to communicate, so accuracy is sometimes in question.
China has roughly 50% of the world’s hogs; as many as 400 million pigs. Their land mass is equivalent to the U.S. and hogs are densely located in about half that area.
China this year said their breeding herd was down 8.3 million sows, a very large number. Some estimate China will lose 30% to 35% of its production, but I believe they are doing everything possible to control this disease, so I think production will be down closer to 20% this year when we can analyze price in arrears. How much is that? As much as 90 million hogs, and that’s a significant number.
How will Chinese consumers respond to the loss of pork?
Most of the protein Chinese consume is pork, and that number is growing. We believe consumptive demand could be down as much as 17% in China as the year ends. They will not try to completely replace that loss with imports from other countries. It would not be physically possible; you would have to double global trade and that just won’t happen. They will eat more poultry, which is already double consumption levels of beef, or they will simply eat less animal protein.
What is the long-term impact of ASF in China?
ASF is a cousin to the Ebola virus. From contagion to death takes around 21 days. To eradicate it you must kill all the animals in the area, and in some cases burn the barn, otherwise let it rest for quite some time after applying commercial chemicals. China is going to battle this for quite some time — probably three to five years. It’s going to reshape the face of the Chinese herd and global pork production.
How much pork could China purchase from the United States?
On average they buy about 2% of our production. The highest amount China has purchased from the U.S. is nearly 4% of our production. Remember, Mexico takes, on average, 7%, so while China is seen as an 800-pound gorilla in world trade, they really haven’t been that big of a buyer of late from the U.S. We do not believe they will supplant Mexico as the biggest buyer of U.S. pork this year. That could happen but not until next year, and we would need to see a trade deal in place for it to happen.
We are going to have another year of record production. Our higher production will allow China to buy a greater percent of our production. That means by 2020 we’ll be seeing perhaps 3% or 4% of our total production purchased by China, maybe as much as 5% if they displace some smaller partners.
How does the tariff war play out in U.S. pork shipments to China?
Right now there is a 62% tariff in place by China against many of our pork products. Yet, we have seen an uptick in recent months on pork products shipped to China. We don’t have any visibility as to who sales partners are. But if it’s a state-owned enterprise, it can elect not to charge itself a tariff. COFCO, one of China’s state-owned food processing holding companies, could buy pork from the U.S. tariff free.
What happens if we get just one case of ASF here in the United States?
We would probably react far more swiftly than China did. But, the only cure is eradication of the entire herd present. You don’t know what other animals will be infected, and it can spread very quickly. So you would see barns managed harshly in a tight geographical location. Our export markets would dry up because no country wants to take the chance, from a disease control standpoint. ASF can live in chilled pork for quite some time. Higher prices would lock some export customers out of the market anyway.
How could swine fever get to the U.S.?
You can literally buy a ham sandwich or a sausage, bring it into the U.S., get past the customs watchdogs, and that’s it. One reason why the World Pork Expo was canceled this year is because there are many players in world pork that could have nefarious motives. It was a drastic decision, but the safest thing to do for the immediate future.
If someone wanted to plant it here in the United States, it could be done in a backpack. That’s why we have dogs at airports to try to stop this, and any time pork comes in it gets destroyed immediately.
There is no known vaccine, but they are in the works; some say they are 10 years out, some say they are two years out.
Here in the U.S. hogs are a big business, so we are doing everything we can to make sure it doesn’t happen here.