First detected in August last year, the deadly African Swine Fever (ASF) virus has spread to every province in mainland China, devastating its pig population. Rabobank estimates the disease will claim 55 per cent of the country’s pig herd in 2019, significant given that China used to account for around half of the global total. A quarter of China’s annual pork production has already disappeared, equivalent to 13m tonnes. To put this into context, the loss is larger than the 12m tonnes of pork produced by the US last year.
The scale of the epidemic and its effects are unprecedented. “We simply have not seen change of this magnitude before,” says Justin Sherrard, global strategist for animal protein at Rabobank. “If I go back 60 years in the data, I cannot find the type of impact on production that we are seeing in 2019.” Predicting further losses in production of around 6.5m tonnes in 2020, Mr Sherrard believes the impact will keep rolling until at least the middle of the decade.
Global repercussions
China’s total pork consumption dwarfs that of any other country, reaching 55m tonnes in 2018, or about half of global intake. The shortfall in production has triggered prices to skyrocket from around 11 yuan per kg at the beginning of the year to 43.66 yuan per kg (£4.76 per kg) in November. Pork is so significant to the Chinese economy that it is mostly responsible for the increase in inflation. China is such a massive producer and consumer of pork that its shortage has also reverberated across the entire global protein market. Average pork prices across the EU hit €1.88 per kg (£1.60 per kg) at the end of November, up almost two-fifths from a year ago. Meanwhile, average pig prices in the UK have increased by 14 per cent since the beginning of the year to £1.56 per kg. As Chinese consumers have switched to alternative proteins, this has also pushed up the prices of other meats worldwide.
Increased prices are likely to have some impact on any UK business that is purchasing meat. Sausage roll maker Greggs (GRG) reported “modest” commodity cost pressure at the time of its half-year results in July and expects higher food input costs to push overall cost inflation to the upper end of its expectations. Analysts at Peel Hunt believe the group will see margin pressures from higher pork prices in 2020. The British Retail Consortium has confirmed that its members have seen higher pork prices, while Tesco (TSCO) stressed that it is “working closely with our suppliers to try and minimise the impact for our customers”. The UK retail price index for sausages has remained flat since the beginning of the year at around 500p per kg, suggesting retailers are currently absorbing the costs.
Increased prices are likely to have some impact on any UK business that is purchasing meat. Sausage roll maker Greggs (GRG) reported “modest” commodity cost pressure at the time of its half-year results in July and expects higher food input costs to push overall cost inflation to the upper end of its expectations. Analysts at Peel Hunt believe the group will see margin pressures from higher pork prices in 2020. The British Retail Consortium has confirmed that its members have seen higher pork prices, while Tesco (TSCO) stressed that it is “working closely with our suppliers to try and minimise the impact for our customers”. The UK retail price index for sausages has remained flat since the beginning of the year at around 500p per kg, suggesting retailers are currently absorbing the costs.
The export factor
With pork accounting for 60 per cent of China’s meat consumption, the domestic shortage has seen import volumes soar to meet this voracious demand – in the first 10 months of 2019, China’s pork imports rose by 49 per cent year on year. Mr Sherrard believes China’s import levels “will remain at elevated levels for the next three to four years. The need will be there, the question is who will provide it”.
As the country’s top pork supplier, the EU has stepped up to the plate, with exports to China from January to September surging by 55 per cent year on year to 1.5m tonnes. Food producer Cranswick (CWK) has capitalised on the export boom and has secured full Chinese export approval for all three of its pork processing facilities. Now accounting for around 60 per cent of the UK’s pig exports to China, the first half of the 2020 financial year saw revenue from ‘Far East’ exports surge by 94 per cent. While this growth is impressive, it’s worth bearing in mind that exports only account for around 9 per cent of group revenue and the domestic picture is relatively benign. Higher UK and EU pork prices could also see margins come under pressure given Cranswick only sources around 20 per cent of its pork from its own farms. On the other hand, stronger UK poultry prices would be beneficial at a time when the group is investing £75m to expand its poultry processing capacity.
European producers are nervous about committing too much investment into expanding production given the threat of ASF spreading further west across the continent. In the UK, the risk level currently sits at ‘medium’, meaning the government expects ASF to reach us within a year. There is also the possibility of being caught out by a potential resolution to the US-China trade war. Beijing had imposed a 72.5 per cent tariff on US pork imports, but announced in September that it would exempt limited quantities of US pork from tariffs. Even with tariffs in place, the increase in Chinese prices means some US products are competitively priced and exports to China have been building. There are signs the US is gearing up for a major return to the Chinese market. One of its largest pork producers, Tyson Foods (US:TSN), recently declared it would stop buying pigs raised with the animal feed additive ractopamine, which just so happens to be banned in China.
The road to recovery
The export window will not last forever, but with ASF still very much present, there is little consensus over how long it will take for the Chinese pork industry to recover. “Some analysts say it will take 10 years, and there are others who say three years,” says Arlan Suderman, chief commodities economist at INTL FCStone. “There are so many variables, such as when researchers can develop a vaccine… But one way or another, it’s going to take time.” China’s ministry of agricultural and rural affairs is aiming for its pig herds to recover to 80 per cent of pre-crisis levels by the end of 2020.
Animal genetics specialist Genus (GNS) will certainly be hoping for this expedited timeline, eager to benefit from the increasing commercialisation of the industry. Small backyard operations previously constituted around 40 per cent of China’s pork production, shying away from modern techniques such as the use of porcine genetics. But ASF has driven a shift towards large-scale, industrialised farms with the capital and technology to implement better biosecurity measures. With some farms capitalising on elevated pig prices and restocking now, the group has seen higher demand for its genetics and expects Asian porcine profits to increase in 2020 – this is versus a 37 per cent constant currency decline in operating profit in the region in 2019. Sophie Jourdier, analyst at Liberum, believes “China represents a substantial opportunity for Genus in the next 10 years”, projecting that the group’s market share could substantially improve from 2 per cent towards its global share of 25 per cent. This could be complemented by a new strategic collaboration with Beijing Capital Agribusiness (BCA), which is seeking to accelerate the use of gene-edited pigs in China.
Further ripples
ASF has not just rocked global protein markets, but has also hit grain commodities. China is the top importer of soybeans, accounting for two-thirds of all international purchases. Around half of these imports end up as feed for the country’s domestic swine herds, so the sharp decline in pig inventories has translated into lower demand for feed grains. Trade war tensions have already interrupted an otherwise continued rise in Chinese soybean imports over the past two decades, and this effect has been exacerbated by ASF. Between January and October, China’s soybean imports fell 8 per cent year on year to 70.7m tonnes.
Amid dampened soybean demand, US farmers have been more reluctant to purchase new agricultural machinery. Equipment manufacturer Deere & Co (US:DE) issued a profit warning at the end of November, guiding that net income will fall to $2.7bn-$3.1bn (£2.1bn-£2.4bn) in 2020, down from $3.3bn in 2019. The group is forecasting that sales of its agriculture and turf equipment – which account for two-thirds of revenue – will decline by 5-10 per cent in 2020.
With less soy being crushed into meal for animal feed, there is less oil being produced as a by-product for human consumption and manufacturing. This has supported demand for other edible vegetable oils to meet the domestic supply gap. Benefiting from a high price spread with soy oil, China’s palm oil imports in the first 10 months of the year rose more than 60 per cent year on year to 4.43m tonnes. Initially, this higher demand had only a muted impact on the palm oil price as existing inventories were used up. But with that stock being run down, the price of crude palm oil has rallied to 2,647 ringgit ($634) per tonne, up 28 per cent so far this year.
Looking ahead, Tristan Price, chief executive of palm oil producer MP Evans (MPE), believes “the forces are very much in place to support further price increases”. He points to a constricted supply of vegetable oils, with soybean and rapeseed production projected to fall in 2020 and drier weather in Southeast Asia prompting lower-than-expected volumes of palm oil. Some farmers have stopped fertilising their palms to maximise margins and this will lead to lower yields in future. Meanwhile, domestic demand from palm oil producers could add further pressure – Indonesia’s push to raise the palm oil content of its biodiesel from 20 per cent to 30 per cent could add 3m tonnes to its annual consumption. Analysts at Bloomberg Intelligence believe China’s rush to palm oil as a substitute could continue in 2020 as the pig herds struggle to recover. Oil World expects China’s soybean crush volume to fall to 83m tonnes in 2020 versus 84.7m in 2019.
