Ag Summit Review

China’s pork industry is in the midst of major structural changes, and the outbreak of African swine fever (ASF)in the hog herd is creating regional supply and demand imbalances unlike any China’s seen before.

In 2015, the government embarked on an environmental plan to improve water quality in its highly populated areas. As a result, pork production shifted to northern and southwestern provinces, away from the urban centers where demand is typically the highest.

Slaughter facilities haven’t followed farms’ migration, and because Chinese consumers prefer fresh pork, live hogs travel long distances from the farm to the processor, said Chenjun Pan, a Hong Kong-based animal protein analyst at RaboResearch’s Food and Agribusiness group, at the
Ag Summit.

The country is also trying to contain an outbreak of African swine fever, largely by shutting down shipments of live hogs and meat across provincial borders.

The result is a supply and demand imbalance that’s severely depressing pork prices in northern China, which typically consumes less pork, but now has increased production and an abundance of frozen pork. In southern China, when annual per-capita consumption is nearly double that of northern China, supplies are tight and prices are nearly double what they are up north.

“Such big price differences are unprecedented,” Pan says. How quickly the government contains the outbreak and lifts restrictions will determine the severity of production cuts and demand for imported meat.

If restrictions only remain in place for the first part of the year, production could drop 6 to 8% as small farms go out of business, she says. Frozen supplies will blunt the impact on consumer prices in the first half of the year, but prices will rise as those stockpiles dwindle.

Pan says China will need to expand its list of suppliers under this scenario. That could mean more imports from the U.S., but much depends on the status of trade talks and the tariff level that’s in place. China currently imposes a 62% tariff on U.S. pork imports.

If it takes most of 2019 to control the ASF outbreak, Chinese pork production could fall by 10 to 15%, a result of sow liquidation in the breeding herd. Some liquidation is already happening, she says, but it’s mostly on small farms. Once farmers begin to sell off larger breeding herds, pork production will take a more substantial hit.

“If the supply gap falls by 4 million to 6 million (metric) tons, there is no country that can meet China’s demand, and China has to significantly increase pork imports from the U.S.,” she says.

There is another wild card: Europe accounts for 70% of China’s pork imports, but it has also had issues with African swine fever. If there’s a new case, China could ban imports from the bloc.

“China will also increase imports of all other meats” if the ASF outbreak stretches well into next year, Pan says.

Poultry is the most common substitute for pork, but domestic supplies are tight due to issues with the breeding flock and efforts to prevent avian influenza. Imports will be an important part of meeting demand.

“I think there’s quite a high possibility that China could reopen to U.S. poultry,” she says, adding that much depends on trade discussions. U.S. poultry imports ground to a halt after the 2015 avian influenza outbreak. “ASF will likely last for more than a year, and I think will be a long-term battle for China.”

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