How African Swine Fever in China Is Shaking Up World Trade Flows

The Depth of China’s Crisis

New outbreaks of African swine fever (ASF), deadly to pigs but not harmful to humans, are still being reported in China. The highly infectious disease has been detected in all 32 provinces, autonomous regions, and municipalities and moved into other nearby countries including Mongolia, Vietnam, North and South Korea, and the Philippines. China’s hog population had been depleted by 41% at the end of October, compared with a year earlier—representing a stunning drop to 190 million pigs currently from 320 million last year. This in turn affects the supply of pork, with October data showing China’s hog slaughter down by 46%.

News of China’s initial ASF outbreak became widely known in August 2018. But it wasn’t until the first quarter of 2019 that the true impact showed up in official statistics and prices began to modestly rise. Pig inventory data for February from the Ministry of Agriculture and Rural Affairs left the herd 17% smaller year-over-year. Prices of piglets and hogs rose sharply in March and April, more than doubling in some areas.

Prices stabilized in May and June, and most provinces lifted hog transportation bans from infected areas. Slaughter facilities were clearing frozen pork stocks so the supply of pork to market was sufficient. But during this time the hog herd was continuing to contract severely as ASF spread, setting the stage for an explosive price rally in hogs and pork.

Piglets are particularly susceptible to ASF and the significant loss of production capacity earlier in the year was felt in August. Retail pork prices accelerated higher, peaking at the end of October at 54.24 yuan per kilogram, according to data collection company Cofeed. While prices have since eased, to 43 yuan/kg currently, that is still up 139% from a year ago. Prices are likely to remain high for some time as supply to butchers remains limited.

China’s average cash price for pork rose in the spring when hog supplies were beginning to contract at a serious rate. But it wasn’t until August and September that the severity of pig losses earlier in the year became undeniable, resulting in exploding prices. Prices, shown in this chart using data from Cofeed, have moderated a bit in November, but are likely to stay elevated for some time.

Seeking New Meat Supplies

China is the second largest per capita consumer of pork after the European Union, according to the OECD, and by far the largest producer. Prior to the ASF outbreak, China produced nearly half of the world’s pork. Now, with the Chinese hog herd depleted by nearly half, repercussions are bound to be felt around the globe.

One origin China is looking to for additional meat supplies is Brazil, which had already become China’s main source of soybeans amid the US-China trade war. Beef exports from Brazil to China are up 23% in the first 10 months of 2019 compared with the same period last year. October exports jumped to 66,000 tonnes, topping the record set in September of 41,000 tonnes. China has continued to issue export licenses to additional meat processing plants in Brazil, for beef, pork, and chicken, making it likely that exports will remain strong.

The chart on the left, using data from Brazil-MDIC, shows monthly beef exports from Brazil to China. Shipments this year (blue line with markers) accelerated to record levels over the last few months as Beijing approved additional Brazilian processing plants for exports. The chart on the right shows monthly chicken and product exports, with big gains in the last few months that are expected to continue. A jump in Brazilian chicken exports around 2016 reflects China’s move to ban imports from the US because of avian influenza. 

China also resumed imports of beef and pork from Canada. Shipments had been halted since June amid health concerns, citing falsified export certificates. China and Canada have been in a diplomatic feud all this year. Some in the industry believe this led to a ban on canola imports from Canada, which further escalated to meat. Canada has offered a safety plan that facilitated resolution of the meat standoff. But Canada is currently challenging China on canola at the World Trade Organization.

China’s chicken and pork imports are each up 49% so far this year, with shipments higher from all major origins. Brazil supplies the majority of chicken, with additional contributions from Argentina and Thailand. The EU is the largest supplier of pork, followed by Brazil and the US.

In a fence-mending move, China reopened its markets to US poultry exports this month. China had banned US poultry in 2015 due to reports of avian influenza, which eventually led to more than 43 million birds being culled in the US due to the disease. Prior to that, the US was the second-largest supplier to China after Brazil. For now, however, US poultry exports to China will still be subject to a 25% tariff that affects all goods during the countries’ trade war.

China also recently lifted its import ban on chicken and chicken products from France, which had been in place since late 2015 following an outbreak of the H5N1 bird flu. Trade from France will focus more on genetic material and less on chicken meat to help China improve its domestic flock.

Changing Eating Habits

High retail pork prices have tempered consumer demand for pork, though the meat is still the country’s most popular by far. Hogs are difficult and expensive to acquire so butchers are slowing down slaughter operations in order to protect profits. National and local government releases of frozen pork reserves are a temporary salve. Other meats will need to fill the protein supply gap.

Pork traditionally dominates meat consumption in China, but African swine fever is forcing some big changes. Pork consumption is forecast to drop 22% in 2020, while chicken demand should increase 15%. Beef consumption is expected to grow a robust 17% in 2019 before leveling off to 3% growth in 2020, according to the USDA. The chart on the right shows the USDA’s forecast for imports taking a huge jump in 2019 and 2020 for beef (blue line) and pork (red line). Chicken, most of which is produced domestically in China, is also set to have significant growth in imports (green line). 

China’s chicken meat production will increase by about 14% to 15.8 million tonnes in 2020, according to USDA estimates. This follows a more than 20% estimated increase in 2019. Imports, although only 5% of total supply, are on pace to be a record in 2019 and should increase again in 2020.

Still, it’s a challenge to get people in China to replace pork for other meats in their diet. A shift from pork to chicken meat has been most prevalent among Chinese institutional entities, including educational and state facilities, and at hotels, restaurants, and in the food processing sector.

China’s per capita pork consumption (tree map at left) far exceeds that of the US and other major countries, and is only surpassed in parts of Europe, according to a Gro comparison of data from USDA PS&D and FAO. Meanwhile, China’s consumption of chicken meat (tree map at right) is far below that of many Western countries, suggesting there is considerable room for growth of chicken and beef in China’s diet. 

The price of broiler chickens has dropped sharply since briefly making record highs near the end of October. Helping to push prices lower were the announcement of the end of the import ban from the US, healthy producer margins, and additional supplies of frozen products. The price ratio of broiler chickens to hogs is now near record lows, which should further encourage consumers to switch to chicken meat.

In addition, some swine facilities in northern China that have been affected by ASF are switching to produce other products, including chicken and duck meat. The facilities have retrofitted their pens to accommodate the different animals. Duck production traditionally has taken place in southern China.

China’s average broiler chicken prices fell in July before being pulled up along with rapidly rising pork and hog prices, according to data from Cofeed. Chicken prices remained at elevated levels only briefly at the end of October before retracing. Chicken is now very attractively priced compared with pork.

An Eye on Soybean Demand

The drastic reduction in China’s hog herd means less demand for soybean meal, a key source of protein for livestock. Soybean crush for this year through Nov. 22 was 74 million tonnes, down 5.4 million tonnes, or 6.8%, from the same period last year. The lower crush rate reduces the need for soybean imports, which are down by 6.2 million tonnes, or 8.1%, through October.

Purchases of soybeans from the US picked up a bit in the last couple of months as the two nations claim to be near “phase 1” of a trade deal, but shipments are still well below pre-trade war levels. Brazil continues to account for a majority of soybean exports to China, despite this being the off season in South America. If a trade deal between the US and China doesn’t eliminate the tariffs on US soybeans by February, Brazil will continue to dominate as the country harvests what is forecast to be a record crop.

Rebuilding China’s hog herd is going to take years, even if the country manages to prevent further hog population declines. Pig producer margins are very profitable, which under normal circumstances would indicate that additional supply will come to market soon. But ASF is still not under control, and therefore a better signal of a turnaround in hog inventories may be found in the soybean industry.

Soybean meal stocks currently are relatively low, so increased demand will result in the need for higher crush rates. Meal stocks typically increase toward the end of the year, so signs that such a build isn’t occurring, or a rise in meal prices, would suggest that demand is recovering a bit.

China’s soybean data already proved its ability to anticipate hog industry developments in late 2018 and early 2019. At that time, poor meal demand and lower soybean crush rates and imports were the earliest indicators that ASF was a serious issue, well before declines in pig inventories were reported by China’s Ministry of Agriculture. Now, as China’s hog industry hopes to get back on its feet, a true, sustained recovery in demand from a growing hog herd should be seen in significantly higher crush rates and the need for increased soybean imports.

Conclusion

China’s hog herd lost 130 million head from a year ago due to African swine fever, leaving a sizable deficit of protein. The drastic rise in pork prices is spurring government action to expand trade relations to meat exporters and release frozen pork reserves. At the same time, consumers are shifting eating habits to chicken and beef as an alternative, leading to higher domestic production and imports. It will take a good deal of time to rebuild pork supplies and bring prices back to normal levels. That will also require a lot of soybean meal. There are several data sources on Gro’s platform to track as the equilibrium of China’s protein supply and demand adjusts to and eventually recovers from the African swine fever epidemic.

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