Return of ASF in China can boost south american prices

 Issues involving animal health are the common driver of global exports of animal proteins. In the outbreak of bird flu in 2015 that sharply affected the US market, Brazil gained the position of top exporter of chicken meat on a global scale. Another recent health event also had an incisive impact on South American exports of animal proteins: the outbreak of African swine fever (ASF) in China.

The ASF disease decimated China’s pig herd, creating a supply gap that took years to be filled. During this period, China massively expanded its purchases of all kinds of animal protein. Brazil stood out in the sales of beef, chicken, and pork. In turn, Argentina and Uruguay gained prominence in beef exports. This movement was quite noticeable between 2019 and 2021. Chicken and pork began to show less significant volumes of shipments from 2021 onward.

On March 15, it was widely reported by international agencies that Chinese health-testing companies pointed to the strong advance of ASF infections in the interior of the country after the Lunar New Year holiday period, but without showing specific numbers of cases. Anyway, the reports brought expectations of a decline in the pork herd and meat production later this year by market agents, so much so that the shares of the main Brazilian meat packers surged the day after the news.

A possible worsening of the situation could lead China to import large volumes of pork from the global market, which would benefit Brazil, perhaps even facilitating the reopening to Brazilian beef due to the need for addressing future deficits of animal protein in its market. However, it is too premature to size the problem, and the news must be regarded as speculation. China’s Ministry of Agriculture and Rural Affairs and the World Organization for Animal Health (WOAH) show no outbreaks of the disease.

Moreover, the live pig futures contracts listed in Dalian do not price in the stress with a possible decline in future supply, which draws attention. The November contract closed last Thursday (16) pegged at 18,645 yuan per ton, advancing only 0.59% over the previous week, when it was positioned at 18,535 yuan. The May contract is close to 16,000 yuan per ton. The difference between the May and November contracts is another point that does not show fear of a deepening crisis but a natural movement of fundamentals already existing in the market. It is also worth mentioning that Chinese pig farming is currently in crisis, as a result of the great increase in domestic supply, so much so that the government has adopted measures aimed at market stability, such as the purchase of frozen meat for reserves, besides asking producers not to increase the number of matrices.

The decline in the Chinese pig herd between 2018 and 2019 was frightening, which ends up rekindling fears. According to USDA data, China’s final pig herd in 2019 was 310.41 mln head, down 27.5% from 428.07 mln head in 2018. The early herd of matrices, in turn, fell 28.9% between 2018-2020, from 43.61 to 31 mln tons. Both the numbers of matrices and the total herd have now been recovered.

The news needs to be monitored from now on, considering that there may also be isolated cases, easier to be treated, as Chinese pig farming is more professional and closer to the Brazilian model.

It is noteworthy that during the ASF outbreak, the Chinese government began to invest in increasing its meat production and, more importantly, to professionalize the sector. The Chinese chicken industry showed rapid growth, something understandable given the shorter activity cycle. In turn, pig and cattle farming have longer cycles. For pig farming, the Chinese government allocated resources to purchase genetic material from Europe, refined management techniques, and improved animal nutrition. The model adopted in China is very reminiscent of Brazilian integrations, in a vertical production pattern, with greater control at all stages, from the grain used in feedstuff to the pork sold to Chinese consumers.

The increase in average productivity in China has been a problem for the sector in recent years, causing the activity to suffer losses. To preserve all the investments made, the Chinese government was proactive in the market again, and its first measure was the reduction in pork imports from Europe, the United States, and Brazil. The second measure was the building of public stocks to halt the downward trend. Finally, the Chinese government offered credit lines to pig breeders at lower interest rates, improving the financial capacity of local farmers.

The possible return of ASF is a serious problem to be considered in a meat industry that already lives with a series of disorders caused by sanitary problems, the most recent example being the advance of bird flu in South America. In any case, China’s lack of transparency in disclosing information opens room for speculation. As previously reported, the WOAH, the entity that rules animal health, has not reported new cases of the disease in China. FAO, another important organization for the sector, shows the evolution of the disease in Asia, which still has epidemiological outbreaks in Vietnam, the Philippines, Thailand, and Bhutan, but without new cases in China.

The meat industry of South America is excited about the possibility of the ASF causing new important losses in the pork herd in China. Optimism at the moment seems unfounded, given the increased professionalism of the activity in China. The fact that production has been verticalized in recent years reduces the chance of more serious health problems. Another aspect is that China is not necessarily transparent in disclosing data that is considered strategic. This type of dynamics is visible in several sectors – and for the meat industry, this would not be different. Therefore, there can really be new cases of ASF in China but without the same size as the 2017 outbreak.

The South American productive sector needs caution when making decisions at this time. Counting on an increase in Chinese purchases at this moment seems imprudent. It is important to point out that Brazilian pig farming is starting to emerge from a historic crisis, and expanding production would be counterproductive at this time.

For Argentina and Uruguay, a new outbreak of ASF in China could boost beef exports, but this information needs to be treated with caution. This type of news generates great volatility in the market and can hinder decision-making. Right now it is essential to carefully monitor information on China.

Tags: China, global market, exports, pig herd, pork, Brazil, Beef, ASF, Animal Health, futures, outbreak, bird flu, animal proteins