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Global pork glut may become an 'overnight' deficit - African Swine Flu could change global meat dynamics
Source: | Author:Simon | Published time: 2020-11-27 | 866 Views | Share:

Todays US hog futures market traded up limit - meaning it reached its daily allowable maximum price rise of 300 points for the period of October to February and was extremely firm for all other months on the board - this was all on the back of yesterday's second outbreak of African Swine Fever (ASF) found in China within two weeks of the first outbreak whereby 30 hogs died at a slaughterhouse.

African Swine Fever disease is highly infectious and once contaminated the pig dies within days - it has been present in Russia and the Ukraine since 2007 and has had devastating consequences within these countries swine populations and has been shown to be almost impossible to contain - the nature of the China's outbreak and the widespread location of infected hogs has all the hallmarks of a similar problem for China as it has been for Russia and the Ukraine.

The concerning point is that both outbreaks have occurred thousands of kilometers apart - the first out break was in northeastern province of Liaoning which saw thousands of pigs culled in an attempt to contain the disease and the second occurred in Zhengzhou in central Henan province and had traveled thousands of kilometers from a completely different region of a northern eastern province of Heilongjiang - each outbreak as stated is thousands of kilometers apart and by traveling such distances implies that all regions in between are susceptible.

The density of the 433 million hogs that reside in China is 1.4 hogs per acre and in Russia it is 0.07 hogs per acre - a 20 fold difference in density with so many hogs existing domestically in China backyards across the country - this is where the real issue lies in trying to control the problem with a highly infectious disease in a densely populated country.

Live Hog Futures rally up limit

The CME Hog Futures today responded early in the day to the news of the second outbreak with all the nearby months jumping in price and reaching the 300 point limit on the day with the further out months increasing in price - December 2019 was up only 100 points implying that the global shortage by December next year might be not as dramatic as what the market believes in the short term. 

Customers I deal with in the US withdrew today on out front pricing - wanting to reassess levels for 2019 as they try to gauge the impact of African Swine Flu with most believing the pork export markets will pick up with or without tariffs. Buyers have been left somewhat dazed by the change in market sentiment and still unconvinced where this is heading.





The potential size of the problem in China

To date the only solution to addressing the problem is culling both infected and potentially infected pigs which in China's case can mean thousands of animals that may need to be slaughtered - this in turn could see the glut of global pork that I referred to in my discussion paper three weeks ago - turning into a global pork deficit in a very short period - effectively a game changer in global protein supplies for years to come which may see global meat prices strengthen and not fall as a result.

The following are some critical numbers to put the situation into context.



When discussing with global pork market experts in the US they believe the ramifications of this are enormous with cull rates being potentially as high as 30% of China's hog population or 130 million head - these views are based on previous problems of containing this virus in Russia and the Ukraine. 

The impact of 130 million head of hogs is 17% of global pork production - to put this in perspective global exports of pork only make up 7.5% of global production and therefore if all pork exports were diverted into China today to meet a 30% hog cull shortfall it would barely meet half of the shortfall needs of the Chinese market - there simply is'nt enough export pork globally at the moment to fill this void.

How to fill the potential China pork void

The table below outlines the per capita consumption in China and what a crucial role pork plays in the everyday diet of Chinese people. 



When looking at the consumption per head within China pork is a clear standout at 30.8 kg per head and should the cull rate be as extensive as has been suggested there will be other proteins to fill the void in the protein demand balance sheet - poultry, beef and sheep meat will all play a role - with no doubt poultry the quickest in its ability to increase production and respond but beef and sheepmeat will be drawn into this demand equation. 

 

The ability of pork supply markets to respond to this is an interesting challenge given that the US tariffs imposed by China is at 78.2% which still creates an enormous barrier as one of the worlds key export countries but what I believe is likely to happen is global pork displacement - whereby other key export markets are likely to divert pork into China which in turn will create export opportunities for US pork into those markets that once took EU, Brazil and Canada pork (60% of global export trade) or any other non US supplier - its a domino affect and the pork flows to where it is most needed at the best price - due to the 78.2% tariff on US beef this will not flow to China but is likely to fill the other market holes left by other suppliers who will sell to China.



Potential impact on global beef prices

What is interesting is that 26% of US pork production is exported and with a potential of global pork demand increasing due to China's potential shortage this will see pork prices climb domestically in the US as increased export demand 'pulls' domestic US pork prices higher - this outlook is what is being priced in Live Hog Futures with the 300 point up limit movement we saw overnight - this in turn is supportive of US beef and chicken prices as US domestic pork prices are likely to go up with a global shortage.

In my paper of two weeks ago the concern was the reverse where prior to this potential China problem of African Swine Fever we were looking down the barrel of a global glut in pork and within a short space of time it could know be a global deficit of pork. 
Talking with US analysts today one scenario was that this would see tightening of pork globally within 3 months as China authorities are likely to move quickly to 'kill the problem' which could see a rise in 2019 average pork cut out of close to 10% and a more moderate rise of 3 % in 2020.


The strength in pork with the US I believe could see price support for domestic US beef cut out prices for 2019 of 8 % and a more moderate rise of 2% in 2020 - there is no doubt the current drought in the US adds another layer of complexity to these forecasts with USDA latest forecasts down slightly for both US pork and beef production in the last half of 2018 but up slightly for next year.

As you can appreciate it is very early to be making too many assumptions on where this could head but there is no doubt the ramifications to the global meat industry is enormous and if/when rain comes to Australia the potential rebound in Australian cattle prices, should the scenarios outlined in this paper come to fruition will be enormous. 

The improved US domestic beef prices I have forecast to result in a 5.8% increase in 2019 and a more moderate 2.2% increase in 2020 - and if these forecasts are correct then we are likely to see a sustained improvement in global beef prices and an extended 4-5 year Super Demand Cycle that is unprecedented. 


Conclusion

At times I am amazed how quickly changes in global meat markets can occur and the outbreak of African Swine Fever in China is one of those moments that can take your breath away - it is unfortunately at the expense of one market that creates the opportunity in other markets - today's rally in US Hog Futures is an important tell tale sign of things to come - and the enormity of this problem has not been lost on the US hogs market today.

I have not mentioned in the body of this paper the progress the US have had with Mexico in recent NAFTA trade talks and the current 20% duty may also be removed sooner than later with the net affect being a further lift in US domestic levels - once again giving more support for global pork and beef prices. The saying that 'a week is a long time in politics', well I think in today's global meat industry 24 hours can feel like a lifetime and the last 24 hours is proof of that.