June 25, 2019 / 3:20 AM / 21 days ago

Breakingviews - African swine fever nudges China towards peak pork

Pigs are seen in a cage during international exhibition of agricultural machinery, equipment, livestock and poultry 'Belagro 2019' on the outskirts of Minsk, Belarus June 4, 2019. REUTERS/Vasily Fedosenko

HONG KONG (Reuters Breakingviews) - African swine fever is nudging China towards peak pork. The outbreak, one of the worst recorded, has sent prices of the meat soaring. That is likely to get worse, even if overall inflation is kept in check, due in part to a cooling economy. It means the disease could encourage a lasting shift among the world’s top buyers.

The outbreak, which began in China last year, may have initially pushed down pork prices as farmers rushed to cull herds. Now it’s pulling them up. The cost to shoppers rose 18% year-on-year last month. An agriculture ministry official said in April that increase may jump to 70% in the second half of 2019.

It’s not yet a concern for the central bank. Pork is estimated to make up around 3% of China’s consumer inflation basket. Bearish projections suggest the headline figure could go up by 1.5 to 2 percentage points, taking inflation to around 4%-5%. That’s above the official target of around 3% this year, but not enough to trigger tighter monetary policy.

For those in the industry, there is a worse outcome: one where prices do not surge. That would indicate consumers are switching to other proteins. China’s per capita pork consumption more than doubled between 1990 and 2014, but demand has since levelled off, according to the OECD-FAO Agricultural Outlook. It has declined around 10%-15% this year due to safety concerns, Rabobank estimates, adding it could take over five years for production to fully recover. That means the amount households gobble up may even have passed its high-water mark.

If so, it marks a substantial shift with enormous impact on global agriculture. China makes up almost a fifth of the world’s population, but produces and consumes roughly half its pork. That in turn fuels demand for inputs such as soy and corn, as well as related fertilizers and chemicals. A 30% drop in China’s pork output would cut global demand for soybeans alone by about 2%-4%, analysts at HSBC estimate. The disease’s spread into Southeast Asia makes matters worse.

The biggest impact, though, is not necessarily domestic. In the U.S.-China trade spat, soybean purchases are one obvious tool to appease Washington. That may no longer be a bazooka in Beijing’s arsenal.

Breakingviews

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