African swine fever: game changer in the global agribusiness sector

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The African swine fever (ASF) is a disease originating in Africa that affects domestic and wild pigs. Although the disease does not harm humans (even when they consume contaminated meat), it is fatal for pigs, as it is highly contagious and quickly causes death. Since it entered China in August 2018, it has been ravaging the local pork industry, which counts 440 million pigs and is worth USD 128 billion. China is simply the biggest market for pork in the world (accounting for about 50% of the global pork production, consumption and livestock) and any disruption there can significantly impact the global pork industry and its related sectors. In 2019, the pig herd is expected to decrease by 20% compared to 2018 because of the deaths due to the disease but also due to mass slaughters.

Impact on the agribusiness sector

The first consequence concerns the pork price itself. To contain the spread of the disease, the Chinese government has taken a series of measures, the most important of which being the mass slaughter of contaminated pigs (or pigs suspected to be infected), with a financial compensation for the breeders of the slaughtered animals. At first, this measure had a depressive effect on pork prices in China. In fact, the breeders preferred to slaughter their pigs themselves and sell them as soon as possible rather than to inform the authorities of a (suspected) contamination, since they were not sure of receiving (sufficient) compensation. The pork market in China was therefore in surplus very quickly. However, given the scale of the contamination, markets are expecting a pork deficit in China later this year, which would finally have a positive impact on prices, both in China and abroad. Thus, between the beginning of March 2019, when the price of pork in China was the lowest, and 26 June, the price of pork increased by 22%, while pork futures in the US increased by 32% (see graph 1). The larger increase in the US is explained by the fact that markets expect Chinese demand for pork from abroad to increase sharply in the coming years (the Chinese imports of pork between August 2018 and June 2019 increased by 113%). This price increase pushes up the food price inflation in China.

The second consequence is that farmers do not rebuild their pork stocks out of fear of another contamination that would worsen their financial losses, despite the various support measures of the Chinese government. Given that these investments are necessary to return to pre-ASF pork production levels – which would take a few years – the sector is reducing its production capacity for the years to come. This will have three effects. The first one is that, in the medium term, the pork sector in China will consolidate¹ and industrialise, allowing the emergence of new players that will act on a larger scale, be healthier and more competitive, and with better margins. The second one is that the Chinese production of pork should decrease proportionately more than the consumption, creating a shortfall filled by imports. The third one is that the Chinese should also redirect their choice of meat to alternatives such as chicken or beef, which should increase Chinese imports for these meats.

The third consequence is that the balance of the international market has changed. Thus, global pork production is expected to decrease by 4% in 2019 compared to 2018 (pulled down by China which should reduce its production by 10% in 2019, see graph 2), while, over the same period, global exports are expected to increase by 8% and China is expected to remain the largest importer of pork (with 25% of total imports), with a sharp increase of 41% in 2019, despite a fall in domestic consumption (graph 2). These imports are expected to come from Brazil, the world's fourth largest producer after China, the European Union and the US (see graph 3). The latter should not take advantage of the increase in Chinese demand because of the trade war with China, which put tariffs on imports of pork from the US. Finally, these changes will not only be visible in the pork sector, but also in other meat types, such as chicken or beef, which are substitutes of pork.

Last but not least, the price implications for raw materials used as feed for pigs are also significant. The decline in pork production, both in China and worldwide, is already having an impact on the soybean price on international markets. Indeed, to supply its pork industry with feed, China imports an impressive amount of soybean – nearly 60% of global imports are Chinese. Therefore, a decline in the pork production in China means a downward pressure on soybean prices. The price of Chinese soybeans dropped by 12% between mid-August 2018 and the end of June, and by 20% between its peak in October 2018 and the end of June (graph 4). Brazil is impacted too. It is China's largest soybean supplier (providing 75% of its imports) and soybean exports to China decreased by 31% in May 2019 compared to May 2018. The price of Brazilian soybeans was also impacted with a decrease of 9% between mid-August 2018 and the end of June. These declines in price and demand impact the companies carrying out feed operations that supply the pork industry of China. Corn prices should also be under pressure but, for different reasons (climates, planting, etc.), the limited supply of corn allows the price not to feel the impact of the ASF. Even a trade deal between China and the US could not balance the price given the significant fall in demand.

To conclude, the ASF is a real game changer in the agribusiness sector. While it only affects one kind of animal, an entire economic ecosystem is turned upside down. The situation could even worsen. And even if the disease were to disappear from China, it could come back at any moment, especially since other Southeast Asian countries have been affected (Vietnam, Hong Kong, Laos, Mongolia, etc.). Given the sharp drop in prices and sales, the competition will be all the harder between the different players in the sector. The survival of some companies is in jeopardy and the sector is expected to consolidate. All that while the year of the pig has barely begun...

Analyst: Matthieu Depreter – m.depreter@credendo.com

¹ Nearly half of Chinese pork producers raise less than 500 pigs each.