Quarterly update: All change as ASF arrives in Germany

It has been said before, but it bears saying again: these are extraordinary times. I was directly involved, as an analyst and advisor, with the incidence of “mad cow disease” in the mid-1990s, and the Foot-and-Mouth Disease epidemics in the decade after in Taiwan and in the UK.

These were big events in terms of human heath scares and animal disease. But they look like a mild bout of hiccups when compared with the impact of Covid-19 and African Swine Fever (ASF) in 2020.

Past outbreaks of livestock disease were more predictable

Those historical outbreaks of disease were more predictable, more localised and more able to be controlled than anything we are seeing now. And their effects on global markets were less significant. The current viruses will leave a legacy long after this year.

The latest disruption to global markets stems from the discovery of ASF in wild boar in Germany in early September. The disease has been spreading west from the East and it had almost reached the border of Poland and Germany by February this year. So, come September it really shouldn’t be a surprise that some wild boar in Germany had returned from their summer vacation in Poland with more than a holiday suntan and a few bottles of vodka.

Germany: the largest exporter of pork

The significance of this is not the local impact on German pig farms – no domesticated pigs in Germany have been infected with ASF. But Germany is the largest exporter of pork and pigmeat to China – and China, and other Asian countries, tend to ban exports from countries where ASF has been found, even if only in the wild boar population.

The big surprise is that the Chinese authorities were not prepared to implement a regionalisation policy for German exports rather than slap a complete ban on all German production. Or maybe those authorities have made a calculation that they can afford to see their biggest source of pork imports put on the naughty list because there is a lot of pork available from US packers – and there is a promise of more supplies of pork from Chinese farmers in 2021. Hold that thought for a moment.

How ugly will prices get next year?

This could get very ugly. As we look at the various components of the global pork market we can get a sense of how ugly prices might get next year. In my last commentary on the global market in July I wrote, “As far as pig prices are concerned – Covid-19 has trumped ASF.”

But those wild boar in Germany have now trumped Covid-19. It seems that ASF is driving prices up – in the USA at least. Figures 1-3 illustrate the uptick that has just arrived in North American pig prices and which has fed through into the global index. The global pig price index was in the downward phase of the cycle in the 1st half year of 2020 but is now showing signs that an upward phase is about to begin – it’s all change.

North American hog prices: new vigour

Finding ASF in one of Europe’s largest pig producing nations has reversed the negative week to week percentage changes in pig prices that have been observed in the global pig price series since April 2020.

North American hog prices have now broken through the underlying global pig price index. Figures 2 and 3 provide more evidence that US hog prices have found new vigour. The US hog futures market appears to think that this newly found strength in the US hog market will continue. Clearly, those futures traders know something that the economists and epidemiologists don’t. It took one wild boar in Germany to change the direction of global prices – what happens if an infected wild boar is found in the USA?

Europe’s pig prices: Decline since March 2020

In 2019 and early 2020 Europe’s pig producers were generally in profit as exports and prices grew strongly. Since the Spring of 2020, however, Covid-19 and its lockdown policies have affected producers in different European countries to a varying degree as local lockdowns and plant closures have impacted local abattoir demand.

Europe’s average pig prices (Figure 4) reached their high in March 2020 and have been in a steady decline ever since. ASF in Germany has added to that weakness as EU packers have reacted to Asian bans on German pigmeat by reallocating and rescheduling shipments in a timely manner. Organised chaos is how it was described to me by one processor.

China’s pig prices: in decline since mid-July

China’s pig prices are stuck in a range but they have been in decline since mid-July. Figures 5 and 6 illustrate these observations. According to China’s National Bureau of Statistics (NBS) the prices of live hogs declined by 5.1% in late September compared to the previous 10 days. This is in accord with the deadweight price data shown here.

Ahead of the mid-Autumn festival in early October the government auctioned a further 20,000 tonnes of frozen pork reserves, making a YTD total of about 600,000 tonnes. China imported 2.5 million tonnes of pork in the YTD July 2020, a rise of 150% from the same period last year and the range of forecasts for China’s imports in 2020 range from 3.5 to 4 million tonnes of pork. The higher figure would be equivalent to a doubling of 2019’s imports, which were 1.99 million tonnes. All of these actions have added to the downward pressure on China’s hog prices.

More sows again in China

Still holding that thought about Chinese pig numbers next year? There is another story that needs to be told about China – and one that suggests another change may be on the way for global pig prices in 2021 and beyond. The Ministry of Agriculture in China (MARA) most recent pig survey indicates that China had 3.5% more sows in August than the previous month, climbing for the 11th consecutive month and up 37% year on year.

The inventory of live pigs also grew, up nearly 5% from the previous month and growing for the seventh consecutive month. The inventory is 31% higher than in August 2019, according to MARA. This puts the end of year inventory at around 80% of a “normal” year. Liu Yonghao, the founder and chairman of the New Hope Group, is quoted as saying that pork prices would return to normal in the middle of 2021. The New Hope Group is aiming to triple the number of hogs it kills in 2021 and to grow its kill numbers by a further 60% after 2021.

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Ramping up financial support for pig producers

Other major packers, and some new entrants, have made similar claims. China has ramped up its financial support at national and local levels by providing subsidies and loans for major pig producing counties in a bid to restore production. Since last year, China has implemented a string of policies to stimulate hog production and stabilise pork prices affected by ASF and other factors. MARA reports that about 23,000 pig farms were either started from scratch or re-opened in 2020.

China, of course, is one country in the world that seems to have restrained Covid-19, and its reaction to ASF in pigs has been equally dramatic through its mega-investments in biosecurity and restructuring the industry. Is this extraordinary year going to be followed by another extraordinary event – the recovery and transformation of the Chinese pig sector in 2021? That would be all change again.