By Steve Meyer
Will China be our next great market forever? Or forever our next great market? The verbal gymnastics offer a key distinction. The first question implies a long-lasting beneficial commercial relationship, and the second implies years of frustration. So far the latter is winning. Or is it?
U.S. pork exports to China historically have run hot and cold. China’s 1.3 billion consumers make sellers of any product salivate, including the U.S. pork industry. They eat an average of nearly 90 lbs. of carcass-weight pork a year – as much as the average European and over a third more than the average American (65.3 lbs. in 2018). Nirvana for a pork seller.
But nirvana isn’t always guaranteed, and the current situation in China is a case in point.
U.S. pork exports to China have varied greatly, with a high watermark in 2008 when China hosted the Summer Olympics. Another surge occurred in 2011 when substantial “blue ear” disease losses pushed China’s pork prices to new highs. This year’s surge has been nothing like that in spite of unprecedented pig losses (and liquidation) due to African swine fever (ASF).
Exports up through June
But through June, U.S. pork shipments to China- Hong Kong were up 15.8% from a year ago after being down 23.5% year-on-year as recently as March. So is this a problem? If so, why and what might happen through year’s end? China has lost a significant portion of its hogs. Most agree hog numbers are down at least 40% from a year ago, and many 50% or more. Not nearly all of the pigs were lost on farms, however. Many were pushed to market before they either became infected or died after a farm was discovered to be infected. The latter would never knowingly happen here, but it did in China and will continue to do so.
The result was ample pork supplies and little or no price increase early in the outbreak. Some warned that ASF’s initial impact would be a rush of hogs and a surge in supplies, but the market failed to grasp a key factor in supply timing. What virtually no one correctly grasped is China’s apparent ability to store frozen product. The number of processed pigs should have flooded the market with fresh pork, pushing prices much lower in the short run. That never really happened. Further, that flood would be short-lived and result rather quickly in shortages. Anecdotal evidence says that a substantial portion of the pork was frozen and then allowed to flow into the Chinese market at a more orderly pace.
But the loss of perhaps half of China’s herd will eventually spell shortages, and signs are appearing that the time is nigh.
Large Gap to Fill
Visitors to China report much less pork on menus and in supermarkets. Chinese consumers will eat less pork because there will be less pork available. There is no way the rest of the world can fill the loss of 200 million or so pigs in inventory and the capacity to produce upwards of 350 million market hogs a year. For perspective, the U.S. slaughters about 125 million head per year. It would take nearly three U.S. industries to fill the void. So, consumption will fall and prices will rise. Does that mean demand will be lower? Not necessarily. It just means that prices will perform their magic of rationing a reduced supply.
But all of this assumes that the trade war will either somehow get out of the way or be overcome by the economic forces. Whether you agree with the president’s approach to this situation or not, tariffs have complicated the U.S. pork industry’s ability to capitalize on the situation.
If that sounds too greedy and crass, then this view is true as well: The tariffs have prevented the U.S. pork industry from helping meet the needs of Chinese consumers. The two are flip sides of the same coin.
China has turned to the EU, Canada, Brazil and the United States to backfill its pork needs so far in 2019. Of the four, it appears that, due to delivered cost in China, the United States has been the supplier of last resort. That may well be the case for the duration of the trade war, but it doesn’t mean that U.S. exports won’t grow. The reason? EU, Canadian and Brazilian suppliers will not sell all of their pork to China leaving their domestic customers high and dry. At some point, China will have to turn to the U.S., even at higher prices, to fill its needs.
If the trade war is settled and the tariffs return to normal, the U.S. will become a competitively priced supplier, driving export volume significantly higher. Whether that happens is a matter of politics, not economics.