Last August, the first cases of African Swine Fever (ASF) hit China’s hog industry. What wasn’t clear at the time is that the deadly, highly contagious virus would turn into one of the most destructive disease outbreaks in recent history, with major repercussions to global producers and trade flows of pork and other meats.

The fatal disease, which affects pigs and wild boars, has reduced China’s sow herd by a staggering 20 percent – and that’s the conservative estimate. Put in context, it amounts to about 12 percent of the industry’s herd globally. Mizuho Americas’ Restaurant and Proteins analyst Jeremy Scott takes a closer look at ASF’s impact – and what it means on a global scale. 

Global shifts in consumption and production

While Chinese hog producers are dealing with massive hits to their herds, pork consumption is declining among Chinese consumers who are understandably hesitant to eat meat from a diseased animal even if the disease doesn’t affect humans. In the short-term, Scott expects consumption of alternative meats in China to drive import growth of chicken and beef, with most of that incremental trade flow in beef coming from Brazil and Australia (though an ag-centric US-China trade deal, if it happens, could favor the US).

In the past, US hog farmers were disadvantaged by their use of ractopamine, a growth agent that was banned by China in 2012. But given ASF concerns in Europe and the growing mix of ractopamine-free pork production in the US, Scott expects the US to play a larger role in pork exports going forward. ASF could also act as a catalyst for accelerated trade negotiations (and concessions) between the US and China, opening the door for chicken exports to China to resume.

Chicken’s future shines bright

Last quarter Scott predicted that chicken prices had hit bottom, driven in part by the impact of ASF on  the pork industry, and that we’d see a “resurgence of chicken on the menu” given its exceptionally low cost. This has indeed played out and the turnaround in pricing has happened faster than anticipated. Operators are making adjustments to their supply pipelines and are switching from beef to chicken to manage costs amidst a rising labor cost environment. Looking ahead, stronger export markets are likely to bolster the industry, and Scott is positive on ‘big bird’ margins across the board.  

What’s next for China?

In the wake of the outbreak, the Chinese government will likely escalate its reform efforts in the hog and pork industries, focusing on further commercialization of hog farming and automation of handling.  Backyard breeders – family-owned farms that often have substandard breeding practices – still account for half of the country’s hog production and were a main factor in the initial spread of the disease.

According to Scott, such reform could be detrimental to herd recovery, but that could be good news for global pork and protein producers. The thinner supply restocking will support higher prices overall, and perhaps drive a surge in imported breeding pigs.

In the short term, alternative meats are likely to experience a surge in demand in China until its pork industry recovers. And if the hits to the herd numbers are anywhere near those being discussed (private reports range up to 40 percent), protein pricing is likely to have a strong run over the next year or more.

 

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