The Market's Fine Print

Forget about what you've heard about cyber-attacks, spyware and internet trolls. Sometimes instances of miscommunication can best be explained by one party simply "missing the memo."

For example, take China's decision this year to cut pork imports by 30%.

How is it possible that the master planners of Beijing, the incredibly talented jugglers of state and private concerns who actually wonder what went wrong if annual economic growth falls below 6%, decided to raise the drawbridge on foreign pork exactly when U.S. producers and processors had shifted into the most aggressive expansion phase ever seen?

At first blush, the disconnect seems so egregious that you might actually blame some bumbling public relations firm employed by Seaboard, Triumph, Clemens Food, Presage Farms and the NPPC for not translating the memo into Mandarin.

After all, it's pretty much beyond doubt that the lion's share of expansion fever seen in the U.S. over the last several years has been linked to bullish expectations of Chinese pork demand. More than just wishful thinking or reckless speculation, serious production plans were specifically tailored to grow a market that had definite requirements.

Chinese authorities banned the use of the growth-promotant ractopamine in 2002, claiming that meat raised with the drug can cause nausea and diarrhea in people and be life-threatening to sufferers of heart disease. At the time, China's hunger for foreign pork seemed such a small piece of the total demand pie to U.S. producers and packers that few saw much benefit from sacrificing the definite feed efficiencies tied to ractopamine.

Personally, China's indignant campaign again ractopamine has always struck me as long on politics, short on sound science, and deep-fried in hypocrisy. Even if you embrace the worst-case scenarios possibly facing consumers of ractopamine-produced meat, they don't hold a sickening candle to real, documented scandals that have surfaced in recent years within China's own food industry: soy sauce produced with human hair; tofu made with sewage; cat and rat meat passed off as rabbit and lamb.

Yet, remembering that the customer, no matter how moronic and self-serving, is always right, I digress.

But once China's appetite for pork imports began to balloon after 2010 (more on the timing in just a minute), climbing from 1 to 5% of the world's largest demand base by mid-decade, the U.S. pork industry could no longer afford to cast a dismissive eye toward ractopamine-free production. Indeed, the explosion of new processing, farrowing, and feeding infrastructure still ongoing is gladly geared to meet the picayune nature of Chinese specs.

Smithfield, the world's biggest pork producer and a subsidiary of Hong Kong-listed WH Group, has raised most of its hogs without the drug for more than two years. As the top exporter of pork to China, Smithfield firm shipped 300,000 metric tons last year.

The new plant in Sioux City opened this fall by Seaboard and Triumph (the country's second- and third-largest pork producers) is designed to slaughter nearly 12,000 head on a daily basis with most of the kill expected to be ractopamine-free.

Finally, Prestage Farms also is planning a new Iowa slaughterhouse for as many as 10,000 ractopamine-free hogs annually by 2018.

So, returning to our original question, with such aggressive planning and high expectations by U.S. producers focused on the Chinese market, why are year-to-date exports to that tantalizing destination down as much as a third from 2016 (i.e., approximately 286 million pounds through nine months on a carcass weight basis)?

While the explanation is complicated, I don't find it altogether discouraging.

It has to do with ugly pollution problems throughout much of China, the serious need to aggressively restructure the Chinese pork production industry, and the challenge to satisfy increasingly demanding Chinese consumers.

The thick smog smothering major urban centers in China has become deeply etched in the Western mind, an alarming sign of global warming and environmental irresponsibility. Less widely known but equally disturbing is the messy and polluting nature of backyard pork production that has traditionally dominated Chinese agriculture.

The haphazard and makeshift rules of such a system have periodically made for some nauseating headlines and pictures. For example, the biggest dead pig scandal took place in March 2013 when 16,000 dead pigs were found floating in the Huangpu River in Shanghai, which supplies drinking water to many of the city's 26 million residents, leading to concerns about water and food safety in the city.

Seeking to eliminate this unwieldy network of backyard producers and replace it with large, modern facilities complete with the best in efficiency standards and waste management, the Chinese government has been chopping away at the arduous process for about the last five years. Sometimes the pace of closing down smaller producers exceeds the rate of big-barn construction. Sometimes the construction of large facilities gets ahead of eliminating backyard lots.

But, all the while, the growing middle class of China keeps getting a little flusher and a bit hungrier.

In all this give and go, this take and turn, I hope you can see how China's need to import pork regularly changes. Last year, China's need for imports soared as backyard production sank faster than the output of big facilities rose. It would appear that the opposite has been the case in 2017.

Clearly, there will come a time in the near future when China's need for foreign pork will stop experiencing large annual swings. By itself, such stability will signal that China has successfully transitioned to a more sustainable pork production system. But it is unlikely to signal that China has moved closer to being self-sufficient in terms of pork. Indeed, the stubborn combination of rising income, accelerating urban sprawl, and limited arable land is apt to make such a goal more and more remote.

From our corner of the world, I think that means long-term gains will justify short-term pains.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(AG)

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