With Chinese pigs getting slaughtering left and right to contain the breakout of African swine fever, also known as "Pig Ebola", so are pork shorts as meat processors around the world scramble to sell more pork to China to make up for sharp shortages of China's most popular protein. The consequence is tighter supplies in the U.S. and Europe, which is pushing up prices. And as the disease continues to spread throughout China - the world’s largest producer and consumer - the trend will only get worse.
Case in point: US retail prices for boneless hams hit $4.31 per pound in March, the highest since 2015.
But none of this compares to what is about to hit China, where consumers are bracing for a shock as pork prices may surge more than 70% in the second half of this year an agriculture ministry official said last month, as the country's pork output has plunged as much as 30% this year, according to Rabobank, and could spike Chinese CPI in the coming months, sharply limiting the PBOC's efforts to stimulate and boost liquidity in the world's (credit-driven) growth dynamo and curbing China's latest attempt to reflate the world and boost global economic growth.
“Some meat that used to go to the U.S. is now going to China because it pays more,” Jens Munk Ebbesen, director of food safety and veterinary issues at the Danish Agriculture & Food Council recently told Bloomberg.
Seeking to frontrun some of the price surge, China recently made its biggest-ever weekly purchase of US pork:
"African swine fever has sparked a rally across global protein stocks, but it’s not too late to buy in,” Morgan Stanley analysts led by Rafael Shin said in an April report to clients this week. “We think the rally has only begun and that the long-term impacts of ASF are still not understood."
Morgan Stanley may be on to something because as Bloomberg reported last week, Thailand, one of Asia’s top pork producers, is intensifying efforts to hold off the spread of the lethal pig virus that’s causing havoc as it spreads across the region.
No longer contained just to China, "Pig Ebola" - which as its name suggest kills nearly all the pigs it infects -has crossed the Chinese border, and has been spreading through Asia from Mongolia to Vietnam and Cambodia. Millions of pigs have been culled, creating a global protein shortage and saddling farmers and food businesses with billions of dollars in costs.
The focus is now on Thailand, where Anan Suwannarat, the permanent secretary in Thailand’s Agriculture Ministry, told Bloomberg that "we’re on red alert for the pig virus" adding that "we’re trying everything to prevent it from spreading to Thailand."
As a result, Thailand has tightened inspections at airports and border checkpoints, cracked down on illegal slaughterhouses and traders, and imposed stricter requirements for reporting hog deaths. The authorities have detected contaminated pork products at airports and borders, but have not yet found any cases at farms.
As Thailand is aggressively seeking to halt the spread of ASF, so is Vietnam, Southeast Asia’s biggest pork producer, which discovered its first case in February. Cambodia - sandwiched between Vietnam and Thailand - reported its first infection less than two months later.
"Preventing the outbreak is our national agenda," said Cheerasak Pipatpongsopon, the deputy director-general at Thailand’s Livestock Department. "Even if it gets into the country, we’ll be quick in containing the outbreak to minimize the damage to the industry."
Unfortunately, it now appears that Pig Ebola has indeed spread and overnight Bloomberg reported that Vietnam has culled more than 1.7 million pigs as African swine fever spread across the country.
But back to Thailand where the Agriculture Ministry has estimated an outbreak may cost the Thai economy more than $1 billion if over 50% of the country’s hogs are infected. That could reach nearly $2 billion if 80% are infected. The Thai government last month approved a $4.7 million budget to prepare the nation for a potential outbreak.
"No country is safe," said Dirk Pfeiffer, a professor at the Department of Infectious Diseases and Public Health at the City University of Hong Kong. "There’s a high risk of introduction of the virus for Thailand, as is the case for every country in the region and beyond."
While not nearly as productive as pig powerhouse Vietnam, Thailand produces over 2 million hogs each year, and exports about 40% to Cambodia, Laos and Myanmar. It doesn’t import live hogs or pork meat and visitors are no longer permitted to bring processed pork products into the country. In a crackdown to prevent infected pigs from entering the country, it has confiscated pork products at its airports and borders 550 times since August, detecting the virus 43 times, according to the Livestock Department.
Making matters worse, porous borders increase the risk of the disease entering the country. The virus can survive in uncooked meat for a long period of time, and hogs can get infected if contaminated food gets into their feed.
But of all Asian nations, it is China that faces the greatest risk by far. China slaughters almost 700 million pigs a year and pork is by far the most widely eaten meat. The problem is that as China scrambles to contain the raging virus, it is forced to cull herds across the country. As Reuters reported last week, citing the latest Ministry of Agriculture and Rural Affairs data, China’s sow herd in April fell a whopping 22.3% compared with the same month a year earlier.
The good news for now is that while pork prices have spiked, resulting in a 14.4% pork CPI in April...
... prices are also being kept in check as frozen pork stocks are being sold - call it the Strategic Porkolium Reserve - since slaughterhouses have slowed down business in order to comply with new rules to test for the deadly virus.
But as noted above, the industry is expecting prices to soar in the second half - perhaps more than 60%, surpassing the great food inflation scare of 2011, with production still falling. “With the disease still present, it will keep falling,” Qin Yinglin, president of Muyuan Foods , China’s second-largest pig farmer, told Reuters. He is right, because while the official May inflation data has to be reported, pork prices in China - along with fruits and vegetables - have surged even more so far in May, putting more pressure on households’ wallets and increasing inflationary pressures.
In fact, as shown below, the price of virtually every food product in China is rising at double digits in China.
China food prices YoY %— HindsightCapital™️ (@Data_Junkie_) May 17, 2019
Live Carp +7
Live Squid -11
Fuji Apples +61
Banana + 8
Kyoho Grapes +8
i feel bad for the person short Fuji Apples and long Live Squid for a pair trade
Making matters even worse, while Chinese Vice premier Hu Chunhua has been encouraging pig farmers to restock farms "as worries grow over the impact of rising pork prices on the economy and social stability", farmers are nervous about repopulating farms that have had outbreaks because of the risk of new pigs catching the fatal disease if the farm has not been properly decontaminated.
But in what is perhaps the biggest headache, this being China none of the data can be trusted. Indeed, as Reuters notes, while there have been 126 reported outbreaks of African swine fever on domestic pig farms, Beijing has not confirmed the disease on many large producers even as industry insiders say many large-scale farms have experienced numerous outbreaks.
Putting all this together, and one can see why Trump felt empowered to resume the trade war at the start of May: after all, between the collapse in trade and soaring food, and especially pork prices, China is suddenly facing a stark risk of stagflation which, as Bloomberg's Benjamin Dow notes, could be yet another force to weaken the yuan beyond 7 per USD (and may explain the PBOC's panic at preventing FX shorts from piling on).
As Dow notes, "higher pork prices combining with a trade slowdown would bring stagflation pressures to bear on CNY." He concludes that the ongoing price surge "may also obliquely weaponize the currency anyway, despite any deliberate attempts by Chinese authorities to avoid such a scenario."
Such a stagflationary scenario could have dire consequences for Chinese monetary policy and the global economy, as the projected 60% spike in pork prices would sharply limit the PBOC's efforts to stimulate and boost liquidity in the world's (credit-driven) growth dynamo and further curb China's latest attempt to reflate the world and boost global economic growth (especially now that Beijing has to tread very carefully following the first failure of a Chinese commercial bank in three decades, sparking the risk of a bank run).
Yet all of this is a welcome development for Trump, because while the raging "Pig Ebola" and surging pork prices are terrible news for pork consumers, Beijing politicians and the Chinese central bank, it's some long overdue good news for embattled US farmers, who will be able to sell their hogs for higher prices as a result of the soaring demand. And while producers may start to breed more livestock, the process takes time. "It will be a good moment for producers," said Didier Delzescaux, the director of French pork council Inaporc.
Finally, it’s not just China that’s grappling with the spread of disease: as noted above, with Asian nations still struggling to contain the surge, pork prices may soar even more as fears spread in Europe that the virus, which was detected in wild boars in Belgium last year, could infect domestic hogs in major exporters, such as France and Germany. France is in the process of building a fence running dozens of kilometers near the border in an effort to contain the disease, unfortunately in a stark comparison to similar "fortifications" undertaken during World War II, this venture will fail spectacularly.
With all that in mind, two parting thoughts: should a worst case scenario unfold and pig production crashes, will pork end up being the best investment of 2019; second - with China clearly at a disadvantage should the disease continue to spread, potentially resulting in social instability if prices rise too high, one wonders if one or more Chinese geopolitical rivals may have something to do with this relentless spread of Pig Ebola. Because what better way to bring a nation, where pork is the primary source of protein for its 1.42 billion population, to heel than to "make sure" that pork production in said nation is crippled for the foreseeable future, resulting in further economic pain, stagflation, and ultimately, a white flag of surrender in the ongoing US-China trade war...