By Dennis DiPietre and Lance Mulberry
It’s a time of great volatility in the global pork market and the U.S. is no exception. Some are exuberant over potential future purchases by China and its effect on the world. Higher U.S. pork prices are being forecasted, with the possibility to extend for many years.
No one knows for sure what will happen, and we stand firmly in that group. There are many factors in the U.S., China and global markets that are influencing prices that suddenly seem to be swept under the carpet when schadenfreude begins to permeate the groupthink.
Suppressed markets and seasonal upswings
Markets in the U.S. were markedly suppressed before the delayed opening of the Eagle Grove, Iowa, plant in early March. Pigs produced to fill that plant had arrived on the scene long before and were weighing on the market. When the new plants became more than future plans, existing plants had enough time to urge their suppliers to expand in order to fill the gap that was coming when the pigs headed for the new plants were withdrawn from their kill. Nothing syncs up the way it is expected to in startups, whether production units or processing plants, so there is always adjustment that needs to be made. Also, we are at the beginning of the seasonal upswing in hog prices and teasing out this effect from others is sometimes ignored.
Tariffs on U.S. pork
A substantial penalty still exists as I write this for U.S. pork to enter China in the way of a tariff. We hope by the time you read this that it will have been removed through a new comprehensive trade agreement with China. We don’t have time to give you a lesson in the history of China, but in a sentence or two, they do not present themselves as vulnerable to competitors due to a long history of oppression by other nations. Their conviction is to never be dominated or taken advantage of again. Don’t expect them to come to the table and buy at any price.
A restructured China
The African swine fever (ASF) dilemma in China will likely require a mandatory restructuring of the industry. Over the next few years you will likely see an even sharper decline in small farms than in the last several years, keeping in mind that those farms are still 50% of China’s total production. Is it likely those producers will continue to consume pork at the same level when they must now go to the retail outlets of the large-scale farms? About 44% of the population is rural without ready access to urban style supermarkets. Small farms feed small communities in China. We are thinking here in terms of degree, not absolutes. In other words, small communities will still consume pork after this restructuring, but will it be at today’s high level (which exceeds U.S. consumption on a per-capita basis)? Even though ASF is not harmful to people, there is a distinct dampening of demand related to distrust.
Reduced pork consumption
The Chinese government has been encouraging people to reduce their annual consumption of meat as a long-term strategic issue. You may not remember it, but in 1977 when Jimmy Carter introduced the modern version of “food as a weapon” of foreign policy by suspending grain exports to the Soviet Union after their invasion of Afghanistan, the Chinese took note. They are executing a wide-ranging, long-term plan to blunt any such vulnerability being leveraged against them in the future.
Rise to speculation
The extent of ASF in China is underreported and this gives rise to speculation and the, “I know someone who visits there frequently, and he/she says…” stories which substitute for real information. Some smart person once opined, “No information is often better than bad information” for decision-making. We know that the Chinese economy has slowed substantially including a decline in exports, the closing of many factories, an overbuilt real-estate market, all of which can lead to a decrease in consumption expenditures and a move to lower cost food items.
There is much more to consider, but space does not permit. A big opportunity for sales and increased prices for U.S. producers due to ASF in China may be ahead, but don’t make the mistake of calculating their total demand before ASF and estimating their production shortfall due to ASF and assume that this will be the required new purchases. That’s not going to happen.
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