March 19, 2019 / 10:43 AM / 6 months ago

Column: African swine fever may shift Chinese soy demand for years

FORT COLLINS, Colo. (Reuters) - Rampant outbreaks of African swine fever in pig herds across China have inadvertently helped Beijing in its recent efforts to avoid U.S. soybeans amid the ongoing trade war. But the deadly disease could have longer-term effects on trade between the two countries as the impacts may linger for years.

Pigs are seen at a family farm in Fuyang, Anhui province, China December 5, 2018. REUTERS/Stringer

China is the global leader in pork consumption and requires an enormous quantity of soybeans to crush into high-protein meal to feed its hog herd, the world’s largest. This high level of demand is the primary reason the United States and Brazil have such robust soybean-export programs.

When the trade war between the United States and China began last year, the math suggested that given recent consumption rates, it would be nearly impossible for China to avoid importing large quantities of U.S. soybeans late in 2018, as Beijing had threatened.

Against the odds, China virtually avoided taking in any U.S. soybeans during the first four months of the 2018-19 U.S. marketing year, when shipments are typically greatest.

Luckily for China, Brazil’s exportable supplies were much more plentiful than anyone had expected. But Brazil would not be able to completely fill the U.S. void if China’s demand was as strong as last year, so there had to be additional reasons why China’s plan had worked.

High domestic soymeal prices in China late last year led market participants to the conclusion that demand had fallen as a result, and this may have been at least partially true at the time.

Soymeal prices have eased since then, but demand forecasts for soybeans have not rebounded, possibly suggesting that the problems with African swine fever (ASF) are more severe and/or widespread than expected. This would support China’s reduced need for soybeans at present.

The timing of China’s ASF problem is very unfortunate for U.S. soybean farmers looking for export demand to bounce back once a trade agreement between the two countries is reached. Eradication of the disease can often take several years, meaning that Chinese soybean demand could be suppressed for a while.

ASF 101

ASF is a serious, highly contagious, viral disease of pigs that can spread rapidly among herds through direct or indirect contact. The increasing globalization of the livestock industry, along with the fact that ASF can survive long-term in uncooked pig products, allows the virus’ introduction to new regions.

The extent of the virus’ deadliness, including the speed at which it can spread and the mortality rate, varies depending on the strain.

Some of the milder strains can be difficult to diagnose, while the more severe ones can kill off entire herds.

Pigs do have the ability to recover from lower-intensity strains, but there is no treatment or vaccine. Eradication requires quarantine and depopulation of affected animals.

Historically, the disease has been difficult to control. An ASF outbreak that swept the Iberian Peninsula in the 1960s took more than 30 years to eradicate completely.

There is no evidence that humans are susceptible to the ASF virus.

FEWER PIGS

The U.S. Department of Agriculture’s attaché in Beijing forecast last week that China’s total swine inventory in 2019 would be down 13 percent to 374 million head, largely due to ASF. Some 115 cases had been reported as of last week.

This estimate varies drastically from USDA’s official forecast of 441 million head, which would represent a fractional increase over last year.

The numbers are already down, though. Data from China’s agriculture ministry on Friday showed that the country’s pig herd in February was down 16.6 percent from a year earlier, and the sow herd had shrunk 19.1 percent. The figures also suggested the pig herd declined 5.4 percent from January, while the sow herd dropped by 5 percent.

Last Monday, live hog prices in China hit a 14-month high and looked set to continue rising as supplies tighten across the country. At least 1 million pigs have been culled so far as a result of the disease.

USDA’s attaché sees China’s pork production falling 5 percent to 51.4 million tonnes in 2019, opening the door for more imports. The attaché pegged pork imports at 2 million tonnes, up 33 percent.

DEMAND IMPACTS

According to USDA, China’s 2018-19 soybean imports will fall 6 percent on the year to 88 million tonnes, which would be the first year-on-year decline since the 21 percent drop in 2003-04 after global soybean crops faltered. Some industry estimates venture down toward the low 80 million-range.

Growth in China’s demand for soybeans was already tapering off prior to this year. Between 2016-17 and 2017-18, domestic consumption expanded by 2.7 percent, the smallest annual increase since the demand drop in 2003-04. USDA sees consumption down 1 percent in 2018-19.

The direction of Chinese soybean demand will play a critical role in the upcoming 2019-20 marketing year and beyond, especially for farmers in North and South America as China accounts for 30 percent of the global consumption of soybeans.

The eradication of China’s ASF problem could take several years, meaning there is a decent chance the country’s soybean demand does not soon return to previous levels, at least not right away.

Even though that may not be positive for U.S. soybean exports, U.S. agriculture may benefit in different ways as China would need to fill its pork demand. During the first week of March, China made its biggest purchase of U.S. pork in two years despite heavy import tariffs of 62 percent.

If this trend continued, it would lift pork and soybean meal demand in the United States and other pork exporters such as Brazil, Canada and the European Union.

USDA’s Beijing counterpart also sees a 9 percent rise in poultry consumption in 2019 stemming from the complications with ASF. This will be coupled with a 32 percent rise in imports. Brazil is China’s largest poultry supplier by far.

China’s beef consumption is also forecast to rise, requiring a 20 percent increase in imports. South American countries provided 70 percent of China’s imports in 2018, though U.S. producers could grab a share if the tariffs were to be eliminated with a trade agreement.

Cattle diets include much less soybean meal than those for hogs or chickens.

The opinions expressed here are those of the author, a market analyst for Reuters. 

Editing by Matthew Lewis

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