US$5 billion opportunity for US hog farmers in China’s African swine fever epidemic, hardly taken advantage of due to trade war

The African swine fever that has devastated China’s pig population has created a new US$5 billion market for American pork farmers – but the trade war isn’t letting US producers take full advantage of it.

Since early this year, the disease-induced hog crisis has wiped out a huge section of China’s pork production and led to an unprecedented shortage in the world’s biggest pork market. The government has been forced to look elsewhere for sources of the meat, a staple in the Chinese diet, and has in recent months boosted purchases of pork from other countries.

China’s demand for imports is expected to grow further, according to “Pork 2040”, a report published in October by the National Pork Board, an information agency sponsored by the US Department of Agriculture (USDA). Those sales are estimated to nearly triple in the next three years, peaking at more than 3 million tonnes by 2022. That would translate into more than US$5 billion in pork imports annually.

“It represents the single largest shake-out ever in the pork chain and heralds a new era in Chinese production and consumption of meat,” the report said.

The disease entered China in August last year and quickly wiped out a large segment of domestic pork production, as hundreds of millions of hogs either died from the disease or were killed to prevent the spread of the virus.

The number of live pigs in China dropped 39 per cent in the 12 months ending in August 2019 after a full year of infections, according to China’s Ministry of Agriculture and Rural Affairs.

Taking advantage of the latest breather in the trade war, US pork farmers have been exporting more to China, with output totalling 5,549 tonnes during the second week of November, the largest amount in a month.

African swine fever virus now ‘endemic’ in Tibet and Xinjiang regions

But the prolonged US-China trade war, which began last summer, has seen trade between the two countries hit by a series of tit-for-tat tariff battles.

And although China lifted tariffs on pork in September, geopolitical uncertainties still hang over the meat's exporters.

“If this dearth in China came at a time when we didn’t have the trade war, American hog producers would have been even more excited,” said Jacob Burks of the futures division at the Wedbush brokerage firm in New York, which advises investors on pork futures trading.

“In that case, it would have been a good guess that purchases from the US would have gone up a lot more.”

In recent weeks, trade talks seemed to be moving in a more positive direction as the two countries pointed to a possible “phase one” deal. But futures analysts like Burks remain unsure.

“There are a lot of empty promises made, nothing is signed yet,” he said. “Farmers are almost immune at this point. They will say ‘Oh, that’s another day of good talk.’”

African swine fever “has created a short-term opening,” he said. “As far as entering the largest pork market, it is absolutely worthwhile.”

China’s pork prices starting to ‘scare’ consumers

Compared to Germany and Spain, the US has not been a major pork supplier to China.

In 2017, American producers sold 166,000 tonnes of pork to China, accounting for 13.6 per cent of China’s total imports. Last year, that amount fell to 86,000 tonnes after China imposed an import duty of up to 72 per cent on US pork as the trade war got under way.

Meanwhile, pork prices in China are soaring. Official Chinese data published in September showed that prices rose by 46.7 per cent year on year in August, after a 27 per cent increase in July.

Now economists expect pork prices in China to double by the year’s end and continue to rise early into 2020.

Stock prices for the largest US pig producers started rising sharply late last year, as investors realised that the big industry players could take advantage of anticipated shortages and higher pork prices.

Shares of JBS, of Greeley, Colorado, nearly tripled to US$15.68 in September from December 2018, while those of Tyson Foods, of Springdale, Arkansas, doubled to US$93 in the same period.

China’s imports began to soar in April after the severity of the disease became clear. With domestic production dropping sharply, the percentage of consumption supplied by imports could reach 10 to 15 per cent in 2020 and 2021, according to the USDA report.

So far, Germany, Spain and Canada are filling the gap.

“The EU has been doing the bulk of the business, but the US and Brazil have a better opportunity going forward as the supply of the EU countries is limited,” said Norman Bessac, vice-president of international marketing at the National Pork Board.

The virus, which does not pose a threat to humans, is deadly for pigs. The fever, which had been spreading through Russia’s scattered pig population for almost 10 years, was slowly creeping closer to the Chinese border in 2018.

Because the hog industry in China transports live pigs across the country, carrying the virus in pigs that could be infected, the spread of the disease was drastically accelerated.

China’s small pig farmers are being wiped out by African swine fever

China’s pig population is expected to fall by 21 per cent by the end of this year, and drop another 10 per cent in 2020, the USDA reported in July. As a result, imports are set to surge to unprecedented levels.

In normal times, the Chinese government caps pork imports at about 5 per cent of the total consumption. But confronted by the swine fever epidemic, Beijing is authorising imports from more countries and slaughterhouses, and will ignore or minimise violations by licensed exporters.

“The clear signal for US exporters here is to make sure to take advantage of the short-term shortage,” Bessac said.

Pork from North America is likely to find a way into the China market even if political issues continue to affect US-China trade – though not in the volumes that would flow if and when the issues are settled, the Pork 2040 report said.

For US exporters, the surge in China could not be timelier: pork consumption in the US has stalled.

“For American consumers, it’s not just about the taste,” Bessac said. “We want to know more information about where the food comes from, for example.”

As of Wednesday, lean hog futures were trading at 60.23 cents per pound on the Chicago Mercantile Exchange for December contract and at 84.73 cents for the July 2020 contract – an indication that investors expect pork prices to rise next year.

“I don’t want to say the herds’ demise is the exporters’ opportunity, but it is,” Burks said.

“We have a very good opportunity now to get a foot in the door of the Chinese market,” he said. “And it might stick.”