More Than We Bargained for in the “Year of the Pig”

Nick Buyse Risk Management Consultant INTL FCStone Financial, Inc.

African Swine Fever (ASF) is defined as a highly contagious hemorrhagic viral disease of domestic and wild pigs and it’s getting a larger share of our attention recently. Over the past few months, the focus is shifting ever so slightly away from stale “trade war” rhetoric towards the rapidly spreading African Swine Fever in China. This is a truly fascinating and unprecedented event taking place, which is changing the global agricultural trading landscape today… with potential impact on dairy.

First, it’s becoming a widely held belief that China is concealing the severity of this issue – and has been since August when the first ASF case was made public. So far China has made about 120 ASF cases public, which seems like a joke to me considering Vietnam – with their much smaller herd – has already reported well over 200 cases since the beginning of February!

 

Word from sources who’ve recently attended major feed conferences in Vietnam remark that there is building concern about ASF spreading into other countries, such as Thailand. Overall everyone in Asia is deeply concerned about the impact on feed demand as hog herds continue to be decimated. And they should be.

FCStone’s chief economist Arlan Suderman recently made a bold statement that Chinese hog feeding is down by at least 30% from this time last year. Thirty percent! This number is nothing short of absolutely mind boggling when you understand that China’s herd is roughly at 440 million hogs. Comparatively the US has a “modest” 73 million hogs. What do these numbers mean? To cover a 30 percent shortfall in China’s herd it will take the annual production from the US, Canada, Mexico, and Brazil combined!

Our FCStone colleagues in China are estimating that it may take 5 to 7 years to fully restore the Chinese hog herd! Other estimates are calling for 4 years to restore the herd which assumes the government will heavily subsidize farmers to rebuild and modernize the industry. All of this begs the question: how will this impact Chinese feed demand going forward?

On the surface, if hog feeding in China is down by 30 percent today, we imagine the largest impact can and will be felt in the already oversupplied soybean market. But there is another piece to the feed puzzle. To have an honest conversation about feed in China, we really must consider the impacts to whey demand.

China buys roughly 200k metric tons or 440 million pounds of whey products from the US per year. That’s about 50 percent of all US dairy export to China. That tallies up to about 20% of all the whey produced in the US on an annual basis!

Piglets consume whey permeate, which is rich in carbohydrates for the first 4 weeks of their life before they are steadily weaned to consume more soybean meal in their ration. FCStone estimates about 16% of whey permeate is exported to China, and that totals to over 50% of all US whey permeate exports. After digging into those export numbers, we see a sharp reversal in global trade for carbohydrates to China.

 

Back in late 2015/early 2016 Chinese whey imports from the US dropped significantly due to poor demand, and whey prices bottomed out in the low 20 cent range. If you look at the whey carbohydrates exports chart we are seeing the same pullback as late 2015. This time around we have export competition coming from marginal Eastern European suppliers. You have to conclude with this type of demand destruction in China that we may experience another downturn to the 20’s in the whey market.

China needs to feed its people and people are creatures of habit. Pork is almost a religion in China. China pork consumption per capita is roughly 90 pounds/ year vs the US’s roughly 65 pounds/year.

In our opinion there is little reason to believe that there will be some sort of long-term shift away from beautifully fat pork products to boneless, skinless chicken breasts in China. As their economy grows, they want more animal protein/fat in their diet – not less.

Moreover, the quickest way to an unstable society is to allow food insecurity to run rampant. Xi Jinping and the Chinese leadership know this and the way to limit unrest is to solve the swine fever issue by both increasing imported pork – and rebuilding their domestic hog market post haste. Those little piglets arole in feeding.

Comments in this article are market commentary and are not to be construed as market advice

This article appears in the March newsletter of the Idaho Dairymen’s Association and is used here with permission.

Be the first to comment

Leave a Reply

Your email address will not be published.


*