The impact of African Swine Fever on the agricultural industry: a complex puzzle
- The outbreak of African Swine Fever (ASF) in China is making headlines as it impacts the biggest pork market in the world. Industry experts consider this a ‘transformational event’ for the global pork sector that is ‘creating a devastating effect.’1
- The knock-on impact of ASF is a complex issue due to multiple factors including the tariff disputes affecting the global pork and feed market, lack of data from China, the difficulty to control the disease and the unprecedented magnitude of the outbreak. We reflect on implications for agricultural markets and farmland investors.
What is african swine fever (ASF)?
ASF is a viral disease that spreads rapidly in pig herds. It originated in sub –Saharan Africa in the early 1900s and is spread by the direct contact of body fluids of infected dead or live animals. Human behavior plays a major role in spreading the disease via feed that contains residues of infected pork (from kitchen waste), lack of biosecurity measures on farms and contaminated materials or livestock transport.
There are no known cures or vaccines for the virus; it has historically been controlled via quarantine and culling of affected animals. Authorities and farmers try to prevent an outbreak by strict sanitation/biosecurity measures on the farm, restrictions on trade out of infected areas, closure of local markets, and wildlife management to control wild boar. For example, the disease spread to Spain, Portugal and France in 1957 and was eradicated in the early 1990s via strict policies and the adoption of modern pig farming facilities.
Cases of the outbreak have been recorded in Russia, Belarus and Central Asia starting in 2007. China experienced its first case in August 2018 in Liaoning Province, and by April 2019 had spread to every region in China and into neighbouring countries Vietnam, Cambodia, Laos and Thailand. The spread into China has been rapid due to around 50% of the country’s 440 million hogs being reared in small scale farming with limited biosecurity and kitchen waste being a likely proportion of the animal feed.
ASF outbreak in China
With China being the biggest producer, importer and consumer of pork globally, the ASF outbreak has a massive impact on the Chinese and international market. China accounts for 48% of the world’s pork production producing almost 55 million tonnes (mt) per annum in 2018. Despite being such a large producer, the country has been unable to produce enough to meet its domestic demand with the country importing 1.6 mt of pork in 2018. Whilst this number sounds insignificant compared to total Chinese production, it is very significant as it relates to the global traded pork market accounting for approximately 20% of world trade.
As ASF has spread throughout all major pig producing regions in China, the number of pigs is falling at a dramatic pace due to animals dying from the disease or culling of infected herds.
From mid-2017 until end of 2018, the herd has decreased by about 6 million sows or about the size of the total U.S. sow herd.2 The latest research by Rabobank expects a year-on-year reduction of pork production by 25-35% in 2019.3 A 30% reduction in the production of pork is the equivalent to roughly 16 mt which is twice the current size of the global export market and larger than the entire US pork production (12 mt in 2018). In addition, with a reported reduction of sows by 21% in March 2019 compared to March 2018, it will take time to rebuild the herd as parent stock needs to be replaced. Large scale farms in China will only look to restock when the risk of a renewed ASF outbreak is controlled.
It is still unknown the final impact ASF will have on Chinese and neighbouring countries’ production, but the information we have today indicates that it will be disruptive to global traded markets. The magnitude of this outbreak is unprecedented compared to other contagious diseases amongst livestock seen over the last years. Historic outbreaks of diseases such as Avian Flu can help demonstrate how contagious diseases of livestock impact domestic demand and trade flows.
Pandemics in livestock production and the case of avian flu
Contagious diseases usually begin slowly and have the potential to expand rapidly if no cure or limitation of the outbreak can be found. A loss of meat production and the introduction of trade restrictions to avoid further outbreaks are likely consequences. The nature of livestock production does not allow for a short-term increase in volume to compensate as all livestock has its given production cycle and infrastructure requirements. Chicken is at an advantage with around 40 days from hatching to slaughter. Pork and beef have a much longer time span of 9 months for pigs and 3 years for beef, depending on the feeding system.
The outbreak of Bird Flu, primarily in China in 2013, is a recent case to study the impact on production, demand and trade. Bird flu, also called avian influenza, is a viral infection that is deadly to birds and can easily affect humans and other animals that are exposed to a carrier. Since 2013, the virus has spread in the poultry population across the country. As in the case of ASF, biosecurity measures are key to control the disease and avoid a pandemic outbreak.
The outbreak had a number of consequences for the Chinese market. Production decreased by 8.3% from 2012 to 2017 but also poultry consumption declined by 15.3% as consumers lost confidence in the safety of the product and as domestic prices increased. Imports increased in the same period 22.4% to compensate for the loss of domestic production and to provide consumers with an alternative and potentially safe product compared to domestically produced poultry (See Table 4). As a result, because domestic demand declined, the rise in imports was less than the drop in production. The international flow of poultry products was affected by the outbreak. Brazil has emerged as the world’s largest supplier of frozen raw chicken products, while poultry industries in Southeast Asia have largely refocused their export markets by converting production from fresh to prepared poultry meat.
The outbreak also served to transform the country’s poultry production system. The traditional production chain with small scale producers, live bird markets and fresh poultry sales came under pressure. The outbreak pushed the establishment of a modern production chain increasingly replacing traditional markets as the main channel.
Pork market in China
With an annual per capita consumption of around 33kg in recent years, pork is the most important type of meat consumed in China. Zhang et. al. showed that pork demand is price sensitive but fairly inelastic, meaning that with a 1% change in pork prices, consumer demand changes by 0.77 %.4 It underlines that pork is an important part of the Chinese diet and pork demand is less impacted by price changes; consumers tend to maintain their consumption levels, despite price increases. Beef, mutton and fish are considered luxuries within the meat budget allocation of Chinese households.5 Prices could, however, surge 70% in China until year end, according to Chinese officials,6 which is likely to push consumers to increase consumption of other type of meats and fish and lower pork consumption. Industry representatives already report decreasing pork consumption in China.7
China will turn to international markets to provide an additional supply of pork. Current estimates from Rabobank and USDA range from a 15%-35% reduction in domestic production, limiting domestic pork supply. The wide variation of estimates shows the lack of available data, aggravated by a rapid outbreak, which requires constant revision of data. Based on 2018 demand and supply data, the need for imports could increase up to 10 mt. Given that this deficit is larger than the entire global traded market in pork, it is expected that pork prices will further rise around the world and lead to reductions in pork consumption in the medium term, so that production will meet demand.
An increase in farm gate and retail pork prices, following the domestic shortage of pork production, will be the key driver to balance the market. The total consumption of different meat categories has a reciprocal relationship. When domestic consumers are purchasing less pork, they are more likely to turn to other alternative meat, such as chicken and beef. This is verified by soaring domestic chicken and beef prices recently. The wholesale chicken and beef prices have increased by 17.4% and 9.0% respectively from August 2018 to the end of February 2019. Due to the shortage in pork production, it is expected that meat in general will become more expensive in China.
The ASF will require substantial investments and organizational rearrangements of the production chain in China, in order to establish a level of biosecurity that provides a stable framework for domestic production. The long-term investments necessary and capital intensity of pig production will require time to address the issue until the production gap can be narrowed again. Estimates to rebuild the herd range from 3-5 years.8
The EU, US and Brazil are all major established exporting regions. Exporting slaughterhouses have to undergo a complex audit by the Chinese Authorities in order to be approved before they can serve the Chinese market, resulting in another limitation to short-term increases of pork exports to China.
Given the complexity of the production chain, these exporters will not be able to significantly increase their production on short notice, but they can redirect trade flows. Prices are picking up in the US, to their highest peak since 2015. (See Table 6). Prices for lean hogs on CBOT have increased 70% since the end of March when the market became more informed about the situation in China. China hog prices are trading at a premium of 11% above Chicago lean hog futures.
China is the leading global soybean importer, accounting for 58% of the world market. Soybeans have historically been imported from Brazil, the US and Argentina into China, where they are crushed into vegetable oil for the consumer market and soybean meal for animal feed. With a smaller hog herd, the demand for animal feed will decrease. The U.S. Department of Agriculture and INTL FCStone Inc. are already forecasting a decline in Chinese soybean imports for the next couple of years. This means that soybean imports by China are forecasted to decline for the first time in 15 years to 88 mt this season and FCStone says purchases could drop again to 71 mt in 2019-20 due to the impact of ASF. The firm’s forecast also assumes the continuation of the tariff dispute.9 Rabobank forecasts imports of 84 mt, which highlights the variability of trade volumes forecasted due to the complexity of the issue and lack of recent market information. There are two factors to consider when trying to determine the impact ASF will have on soybean demand. The first is that the smaller scale farmers, who have been more impacted by ASF, do not include soybean meal in their pig feed to the same extent as an industrialised farmer. Secondly, the recent drop in soybean prices has led to soybean meal becoming an attractively priced source of protein in the feed mix and could therefore lead to higher allocation in the feed mix. Therefore, it is an inexact science to predict how much soybean imports will fall in the short-term. Over the longer-term, the impact of ASF should lead to a more rapid adoption of commercial hog farms with stronger health and safety controls which will lead to higher demand of soybean meal in the future.
Part of the decrease in soybean exports to China can be compensated by stronger demand from hog producers in exporting countries. Exporters may not be able to quickly change the number of hogs they produce in 2019 but depending on the price levels, expansion of pork production can be expected via higher weights with more attractive pork and feed prices.
A farmland investor perspective
ASF is an example of an external shock to agricultural markets, affecting production and trade flows. They can occur for a variety of reasons and farmland investors need to keep the following considerations in mind.
A. Preference to invest with a view on major exporting regions
The food and agriculture markets internationally are closely connected. Global trade balances the differences between surplus and deficit regions. Major exporters have achieved their leading position based on a strong agricultural base, access to capital for investments, and an efficient logistic infrastructure base to serve international clients. They are the low cost producers with a competitive advantage. This is a complex competitive advantage, which is not easy to replicate. By investing in farmland in major exporting regions, investors will benefit over time from increasing exports to serve deficit markets around the globe.
B. Preference to invest with a view on global diversification
Key exporters for the main commodities in the Americas, Europe and Australia are able to redirect their trade flows and balance shortfalls in other regions. As their position might vary over time due to trade disputes, currency fluctuations and other variables, global diversification will help to stabilize returns.
C. Preference to invest with a view on the entire production chain, considering cost, quality and availability of the product
On the market for further processed products like meat or dairy, key exporters have achieved their leading position not only based on production cost. Western Europe can serve as an example, which is a leading exporter of pork to Asia, despite lacking a sufficient protein feed base for its pork industry. An efficient coordination of the production chain from the farm to the final product, ensuring a stable supply and high safety is a cornerstone of competitiveness. The entire production chain needs to deliver a final product in quality, availability and price that serves the clients’ needs within modern distribution channels.
When investing into farmland or agricultural production, it is important to assess the overall competitiveness of the production chain serving the export markets. With a focus on (I) key exporters with proven competitiveness (II) a diversification into different regions and (III) a view on the entire production chain to produce the final product, investors are well positioned to benefit from the overall increasing demand for food. The ASF outbreak underlines the need to take this broader view when investment decisions are taken.
3 Rabobank Pork Quarterly Q2, May 2019: Christine McCracken
4 Haifeng Zhan, et.al.: Factors affecting households’ meat purchase and future meat consumption changes in China: a demand system approach. Journal of Ethnic Foods. Volume 5, Issue 1, p. 24-32. March 2018
5 David L. Ortega, H. Holly Wang, James S. Eales, (2009) “Meat demand in China”, China Agricultural Economic Review, Vol. 1 Issue: 4, pp.410-419
8 Almeida, I.: A deadly pig disease is reshaping the global al soybean market. Bloomberg Business April 15,2019
9 FCStone, “Chinese Pig Epidemic Poised to Reshape Global Trade”
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on factors such as market conditions or legal and regulatory developments. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions made in preparing this material could have a material impact on the information presented herein. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
This information does not constitute investment research as defined under MiFID. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
As an asset class, agricultural investments are less developed, more illiquid, and less transparent compared to traditional asset classes. Agricultural investments will be subject to risks generally associated with the ownership of real estate-related assets,including changes in economic conditions, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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