A miserable Year of the Pig for China's hogs is godsend for American farmers

Eric Ng

In China, pigs symbolise wealth. And 2019, being the Year of the Pig, was supposed to be a great year to make money. Instead, the nation's 26 million hog farmers are battling the deadly African swine fever epidemic that is in its second year now.

The virus, harmless to humans, has spread across 32 of the nation's 34 administrative regions since the outbreak was first reported in August 2018, affecting a large portion of the nation's 348 million strong swine inventory, according to Rabobank.

"We estimate China's current herd loss is 40 per cent year on year, which may expand to over 50 per cent by year-end," the Dutch bank said in a report last month. "We expect an additional 10 to 15 per cent decline in both herd and pork production in 2020."

The outbreak, which has wiped out 20 per cent of the planet's hog herd, is pushing the Chinese government to look for imports from the US, Europe and Brazil, and substitutes such as beef, poultry, fish and even plant-based protein.

Piglets at a farm in Yiyang county, in China's central Henan province. Photo: AFP alt=Piglets at a farm in Yiyang county, in China's central Henan province. Photo: AFP

The highly contagious disease that kills all pigs and wild boars it infects was originally restricted to Africa. In 2007, it was first seen in Georgia at the crossroads of Europe and Asia. It has since spread westwards to eastern and central Europe and eastward to Asia, according to the Food and Agriculture Organization of the United Nations.

After infecting hogs in China last year, it has moved this year into farms in Mongolia, Vietnam, Cambodia and Laos. There is no cure.

While vaccine candidates are being evaluated in laboratories in several nations including China, a cure is still several years away, said Dirk Pfeiffer, a professor at City University's Jockey Club College of Veterinary Medicine and Life Sciences in Hong Kong.

Mainland China had lost 26.7 per cent of its breeding sows by the end of June from a year earlier based on the Ministry of Agriculture and Rural Affairs' tally.

The effect of a major decline in new pig births began to surface this summer, after hog supply initially rose and suppressed pork prices before sick pigs were culled to contain the epidemic.

Hog prices have risen 80 per cent this month from their lows in February to around 19 yuan a catty (US$2.70 for 600 grams). The prices are up some 46 per cent before the epidemic broke out.

As pork " a staple in China " is the leading driver of food prices, consumer price inflation rose a higher than expected 2.8 per cent last month and could breach 3 per cent in the months ahead, Nomura economists said in a note.

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This complicates the task of policymakers in Beijing who are already dealing with slowing economic growth amid an escalating trade war with the US.

China, which produces and consumes roughly half of the world's pork, has been largely self-sufficient before the epidemic.

But the Chinese hog farming sector's outlook is bleak, as the overall herd size is forecast to fall 20 per cent this year and a further 10 per cent next year, according to the Foreign Agricultural Service of the US Department of Agriculture.

A 6.2 per cent year on year fall in domestic hog supply in the first half meant the slaughtering and meat processing industry imported 818,702 tonnes of pork " 26.3 per cent higher year on year " to meet demand, according to government statistics.

Even the US, the world's second largest pork producer and the largest exporter that is in the midst of a trade war with China, has helped to plug the supply gap in the past few months. Exports to China in the second quarter doubled year-on-year to 60,898 tonnes, according to the US Meat Export Federation.

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This was made possible by a sharp increase in prices in China and depressed US prices because of excess supply, which helped to offset a 62 per cent import duty slapped by Beijing on US pork exports.

Meanwhile, US production is expected to grow 5.5 per cent year on year in the second half, thanks to a large breeding herd and higher productivity, according to Rabobank's forecast.

This is bodes well for Hong Kong-listed WH Group, the world's largest pork producer, which has been caught in the middle of the trade war.

Besides controlling China's largest hog slaughtering and packaged pork facilities, WH also owns Virginia-based Smithfield Foods " the top US hog producer and pork processor " which it acquired in 2013.

WH Group chairman Wan Long (centre) said his company would increase pork imports from Europe and South America to hedge the risk of Chinese tariffs on US exports. Photo: Jonathan Wong alt=WH Group chairman Wan Long (centre) said his company would increase pork imports from Europe and South America to hedge the risk of Chinese tariffs on US exports. Photo: Jonathan Wong

WH Group chairman Wan Long said on Tuesday to ensure it has enough supply to meet Chinese demand, the firm would increase imports from Europe and South America to hedge the risk of Chinese tariffs on US pork.

At the same time, Smithfield's chief financial officer Glenn Nunziata said that while rising Chinese price premium over US prices is favourable for more fresh pork exports to China, the firm will also work on expanding sales to Mexico, Japan and South Korea as a backup.

A de-escalating of tensions would certainly help WH Group and other US pork suppliers.

But the trade appeared to have hit a massive hurdle this month when Beijing retaliated against US President Donald Trump's move to impose 10 per cent tariff on US$300 billion by suspending purchase of US agricultural products.

Some of Smithfield Foods' pork products, which is owned by Hong Kong-listed WH Group. Photo: Reuters alt=Some of Smithfield Foods' pork products, which is owned by Hong Kong-listed WH Group. Photo: Reuters

David Ortega, an agricultural economist with Michigan State University, said that the US, as the world's top pork exporter, could nevertheless help satisfy Chinese demand.

"The rise in domestic Chinese pork prices can offset some of the tariff's impact, but there is a lot of uncertainty as the trade negotiation is fairly fluid ... other pork exporters like the EU and Brazil are positioning themselves to meet Chinese demand," Ortega said.

Canada, another major pork exporter, has sent 217,193 tonnes to China in the first six months, up 50 per cent from last year, according to Canada's Agriculture and Agri-Food Department.

However, since June 25 China has stopped accepting meat from Canada after a pork shipment was found to contain ractopamine, a banned feed additive.

The Canadian government said the shipment probably came from a third country and the certificate might have been falsified.

Relations between China and Canada have cooled since Huawei Technologies' CFO Meng Wanzhou was arrested in Vancouver last December. Photo: The Canadian Press via AP alt=Relations between China and Canada have cooled since Huawei Technologies' CFO Meng Wanzhou was arrested in Vancouver last December. Photo: The Canadian Press via AP

Relations between Canada and China rapidly soured last December after Huawei Technologies' chief financial officer Meng Wanzhou was detained on US charges relating to alleged violation of sanctions on Iran.

Other nations have also cashed in on opportunities.

Exports from the European Union " led by Germany, Spain and Denmark " in the year's first five months surged 52 per cent year on year to 432,293 tonnes, while exports from Brazil in the first half gained 28.9 per cent to 92,188 tonnes, according to Darin Friedrichs, a Shanghai-based analyst at commodities brokerage INTL FCStone.

He expected the US to be the biggest potential source of additional pork supply to China as Canada has been banned and Europe only has limited extra supply, adding that negotiations for more supply from Brazil were ongoing.

However, even as China increases pork imports, he said there were bottlenecks that need to be addressed.

"A lot of the infrastructure isn't built for frozen or chilled pork ... it is for live hog that is killed close to the market," he said.

Besides pork, China has also lifted chicken and beef imports by around 50 per cent in the first half from a year ago.

Friedrichs said that in the long term, small pig farms were expected to be phased out, while larger ones will deepen vertical integration into downstream slaughtering and processing so that hogs can avoid exposure to the virus.

This was likely to speed up industry consolidation, he added, noting Beijing has been offering farmers in northeast China subsidies to build larger facilities integrating breeding and slaughtering.

Darin Friedrichs, a Shanghai-based analyst at commodities brokerage INTL FCStone, says China's pig farming sector will see consolidation. Photo: Handout alt=Darin Friedrichs, a Shanghai-based analyst at commodities brokerage INTL FCStone, says China's pig farming sector will see consolidation. Photo: Handout

For leading Chinese companies that have capacity to expand, the future looks bright.

Shenzhen-listed Muyuan Foodstuff, China's second largest pork producer that sold 11 million heads of hogs last year, said in July that it expected to post a net profit of between 376 million yuan and 396 million yuan in the second quarter on the back of higher prices, after a loss of 145 million yuan in the first quarter.

The epidemic has not derailed its aggressive target to boost production to 14 million heads this year, according to a report from brokerage Changjiang Securities.

Still, Pfeiffer of City University, said it will be a long road to recovery for the industry because of the sheer density of farms in China and poor biosecurity behaviour in the entire chain right from farmers to slaughterhouse staff.

"It would be a miracle if African swine fever can be controlled, let alone eradicated, within the next five to 10 years," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.