Why African Swine Fever Will Have a Devastating Impact on the Pork Industry
by Betsy Freese, April 16, 2019
When Christine McCracken, senior protein analyst for global lender Rabobank, predicted early last fall that the African swine fever (ASF) virus spreading in China would change the whole landscape of meat production worldwide, some of her clients thought she was exaggerating. Or just plain crazy. Not now.
ASF has spread to every province in mainland China and will soon affect an estimated 150 to 200 million pigs, says McCracken. She expects Chinese pork production losses of 25% to 35%. This loss is at least 30% larger than annual U.S. pork production and nearly as large as Europe’s annual pork supply. In addition, Rabobank expects production losses to exceed 10% in Vietnam – the world’s fifth largest pork-producing country and a significant supplier to China.
Rabobank believes there will be a net supply gap of almost 10 million metric tons in the total 2019 animal protein supply, which will increase farmgate and consumer prices.
We asked McCracken a few burning questions:
SF: Are you confident in the data?
CM: Our team in China meets with producers, packers, feed companies, equipment companies, genetic suppliers, animal health companies, and other banks. We are the world’s leading food and agricultural bank, so we have relationships with a majority of the largest industry players. We build our forecasts using input from our global team of protein analysts and model all of the potential scenarios. It is a mosaic, and you have to put all of the pieces together to get the complete picture.
Initially there were a lot of conflicting data points and it was difficult to separate fact from fiction. As evidence grew and the magnitude of the losses became clear, we were able to provide a better estimate of the loss.
It is difficult to remember any event having such a devastating impact on the pork industry. It will be nearly impossible for China to find enough protein to fill that gap in supply in the short run. There are just too many logistical hurdles and not enough surplus protein.
SF: Do your clients understand the impact of ASF?
CM: The U.S. protein industry does not fully comprehend the magnitude of the losses or the potential impact on the global market. It’s hard to wrap your head around it. Some of the companies further downstream, like further processors and other buyers of meat, still don’t think it is a big deal. There is really a wide range. There are very well-informed people in the industry that understand ASF and all of its implications. There are others who are in denial or think the impact will be short-lived, and really everything in between.
The lack of credible information invites speculation. It is this information vacuum that is creating a lot of volatility in the market.
SF: How is this impacting the U.S. meat industry right now?
CM: There hasn’t been much direct impact thus far. The market has run on the expectation of stronger export demand from China, but orders have been spotty. There are foreign buyers looking for long-term supply arrangements with our pork processing plants, but U.S. suppliers have been slow to commit. There is a relatively fixed amount of pork to export and ultimately it will go to the market that is willing to pay the most, and that may or may not be China.
Packers would also need a consistent supply of ractopamine-free pigs and a dedicated shift or a portion of a shift to ensure there was no cross-contamination. There are a few plants that have that capability and will be shipping six-piece carcasses to China, but it will not be everyone.
One potential positive of making the shift to split carcasses is the potential labor savings. By eliminating the deboning and the need to sell product domestically, you can reduce some of the labor. For most companies these are workers who can be used in other plants or on other lines. If your plant has a labor issue, if you have been struggling with labor already, this could help alleviate some of those constraints.
SF: How long will these changes have an impact on the meat industry?
CM: China’s problem is not going away anytime soon. There is no easy way to control the disease and no way to prevent it. Operations that have been hit with ASF are unlikely to come back into production for several years. China will rebuild, it will want to produce its own pork. The government wants the country to be self-sufficient. The issue is how to repopulate the herd when the risk of reinfection is so high. There are already funds being raised to begin the work, but right now the risk is just too high.
China’s pork industry will look much different in the future. They want to build fully integrated facilities, where pigs are raised and killed at one location. That will take years. These new, larger farms just magnify the risk. Thousands of pigs at one location just concentrates the risk and magnifies the loss. I don’t know if anyone has figured out the perfect solution.
SF: China says it will switch its consumers from pork to chicken.
CM: Consumers will eat more chicken (and duck, eggs, and beef) in the short run simply because pork will not be available. Some consumers have already moved to chicken out of fear of contracting ASF, despite the fact that there is no human health risk. This reflects the Chinese consumers’ lack of trust in the government after several food-related scandals.
Chinese chicken producers are already trying to increase production. The industry continues to struggle with outbreaks of avian influenza and poor genetics after restricting imports for many years. Chinese consumers still prefer to buy their chicken in the wet markets and eat a smaller, dark-feathered bird. Imported product is not well-suited to this market, aside from some foodservice and canteen business.
SF: Will pork be so expensive that Chinese people can’t afford it?
CM: China will have to compete in global markets and pay high prices to meet its import needs. And high prices are likely to ration demand, unless these markets are subsidized. Feeding its people is a priority for the Chinese government, and there is likely to be some government intervention. We have seen this in the past. It is unlikely the Chinese consumer will see the full impact of high meat prices.
SF: What happens with exports to other countries?
CM: U.S. packers have worked with their counterparts around the world for many years and may be reluctant to sell to China, with no guarantee they will be there in the long term. That said, whoever pays the most ultimately will get the pork. It is really as simple as that. There isn’t enough to go around, though, and that will likely create problems for price buyers.
SF: Should U.S. pig producers expand in light of this information?
CM: I would be reluctant to ramp up production based on what we know today. There is still a lot of risk. China has never been a consistent customer and there are no guarantees. We also run the risk of getting ASF here in the U.S. That would disrupt exports and leave U.S. producers holding the bag. It was only a few months ago that we were looking at losses tied to surplus production; I wouldn’t lose sight of that.
SF: Do you think we will get ASF here?
CM: Everyone argues that we won’t get it here because we have modern systems with strong biosecurity. Don’t forget we have tools to control PRRS and PED and we still break with those viruses every year, so why couldn’t we get ASF? The reality is that ASF will likely arrive in contaminated meat products brought in by a tourist from an infected country or in feed ingredients. These will be hard to control, which is why the industry is looking for additional funds to manage the risk.
SF: What is the Chinese government saying about ASF?
CM: Well they really didn’t say much about the disease for several months, which only made the situation worse. By the time they acknowledged it was an issue, the damage had already been done. It has now spread to every province in China, and there is almost no way to get it under control. They still aren’t saying much, providing very few details about the losses or how they intend to control its spread. They are also telling their producers a vaccine will be available soon, which based on every scientist we talk to is a near impossibility.