Kub's Den

According to official estimates from USDA, China has typically been the home of more than half the world's swine herd. Roughly 440 million hogs called the country home in 2017 and 2018, compared to 74 million in the U.S., 150 million in Europe, and 117 million in the rest of the world combined. Then, pre-emptive herd culls became extensive in late 2018 and the first half of 2019 as African swine fever (ASF) spread through the Chinese swine herd; a good chunk of that swine population was lost. Conservative estimates range from 26% to 40% (114 million to 176 million head culled), so let's assume at least 15% of the entire globe's swine stocks have been lost to the disease in that country alone, without considering the animals also culled in Europe and elsewhere. Total ASF losses could easily be pegged at 20% of the global swine herd.

None of that is new news. The lean hog futures market, being ever forward-looking, perhaps jumped the gun when it rallied in March 2019, assuming that losses to the swine herd in China would automatically lead to a tighter global supply scenario and higher prices everywhere. In reality, Chinese pork prices went the opposite direction. Pre-emptive herd culls created a glut of pork availability inside China. Animals that weren't yet sick from ASF, a disease that doesn't pass to humans anyway, were slaughtered and the abundance of meat was sold at price levels that were basically on par with pre-ASF 2018 prices (under 15 yuan per kilogram). From the perspective of a Chinese pork consumer shopping at the local market, this ASF business always seemed like it was going to be a big problem ... someday.

Well, it appears that someday is now. China's statistics bureau this week released its regular series of inflation data, including pork prices, and those pork prices surged during the month of August. Finally, the pace of swine herd liquidation may have slackened or run its course (information on this actual pace is unavailable), but without the culled pork coming to market -- and with a diminished sow herd producing market animals for slaughter -- the Chinese domestic market is starting to feel the squeeze.

National average pork prices in China from August are reported at 38 yuan per kilogram, a sudden doubling of the level from July. In units that are clearer to Americans, that would be equivalent to about $2.40 per pound, which at first doesn't seem so bad. A quick check on Walmart's online grocery shows U.S. pork shoulder available at $2.94 per pound and bacon at $4.16 per pound. However, these aren't really the same products -- the Chinese price is for butchered hogs at a market, and the U.S. price is for a retail product already packaged and transported. Also, keep in mind that average yearly wages for a worker in China are equivalent to less than $12,000 USD.

In any case, the current pork price is a record high in China. It's alarming enough to Chinese central party officials that the task of rebuilding the swine herd has been called "a military-style order," lest out-of-control prices "affect the effectiveness of building a comprehensively well-off society and undermine the image of the party and the government," according to Financial Times reporting this week. Major subsidies have been offered to construct new large-scale hog facilities -- the commerce ministry will dip into its strategic frozen pork reserves, and one city is even offering subsidized pork prices to consumers 1 kilogram at a time.

Doesn't this seem like the kind of scenario in which the United States, owner of the globe's third-largest swine herd, would benefit? In a world without trade wars and tariffs -- yes, probably. In the world of September 2019, when China has declared an additional 10% of retaliatory tariffs on U.S. pork, bringing those tariffs to an eye-watering 72% total -- only somewhat.

U.S. pork exports to China have been growing (a lot), but are still only 20% of our total accumulated exports so far this marketing year. Instead, it's Europe and Brazil that are best positioned to amp up their pork sales to China. The December lean hog futures contract at the CME on Tuesday hit its lowest price in a year: $57.775 per hundredweight.

Implications for ag futures markets extend beyond hog prices themselves. U.S. soybean meal futures prices have been dwindling alongside the lackluster soybean market. The September soybean meal chart is down 11% since the end of May, and it hit a fresh contract low at the start of this week: $286.40 per ton. A whole global population of soybean-meal-eating livestock -- North American poultry, Asian hogs, Asian poultry -- may benefit from benchmark animal feed costs dropping in this manner. It's only when we see the scale of China's loss (the huge proportion of their own animals that have been lost to this ravaging African swine fever) that we can understand the damage done to our own markets, too.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BE/AG)

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