While Irish pig farmers have had a tough time with market prices, farmers in China have been grappling with African Swine Fever (ASF) since last August. This is leading to the departure of many small- and medium-sized pig farmers from the industry in China, which over recent months has meant a big supply of pigmeat in China. However, it is expected that this will dry up from the second quarter of this year.

The other big variable in the Chinese market is the trade position with the US, traditionally a supplier of 300,000t of pigmeat and feed for the industry. US pigmeat represents just 1% of the Chinese market but the imposition of a 25% tariff on soya is a much more serious issue. This and ASF could lead to a shortfall of pigmeat in China this year of 5m tonnes, a deficit that would create a market opportunity for Ireland in what is now established as our second most important market for pigmeat.

Impact of soya tariffs

Soya beans are an integral part of pig production in China, making up 22% of pig feed. The US had been a major supplier and this was one of the products chosen by the Chinese authorities for retaliatory tariffs on the US in response to President Trump imposing tariffs on Chinese steel and aluminium in 2018. The imposition of a 25% tariff has meant US soya, which made up two thirds of China’s imports has been squeezed out of the market, being replaced largely by Brazil.

The cost of soya has increased by 20% to China’s pigmeat producers and this has led to the China Feed Industry Association introducing new standards for protein requirements in pig feed and thereby dependence on soya imports

African swine fever (ASF)

The first outbreak of the disease was recorded as being on 3 August last year, and since then there has been more than 100 incidents reported from 24 provinces resulting in more than 900,000 pigs being culled. The government imposed strict emergency measures in response to contain the disease and a ban on movements from all affected provinces resulted in a massive price difference between producing and purchasing regions in the country. While the average Chinese pig price is CNY 14/kg (€1.83/kg), prices in the western provinces are double those in the northeast of the country.

Impact on farmers

Pigs from infected herds are culled, with the government paying compensation of CNY 1200 (€155) per head. However, production costs are estimated to be between CNY1400 per head to CNY1600 per head (€175 to €200 equivalent) so that leaves farmers with a huge loss where their pigs are culled – see graphs.

There has also been a move to slaughter pigs earlier than normal caused by a fear of their herds becoming infected with ASF. In the processing sector there is also a reluctance by some factories to deal with smaller producers because if infected product is found in the factory there is no compensation. This means that processors have a preference for imported pigmeat supplies over small local suppliers.

Consequences of ASF

China produced 54m tonnes of pigmeat in 2018, a drop of almost 1%, and the pig herd declined 3%. However, since the outbreak of ASF in August, the national sow herd has fallen by 15% and in the worst-affected northeastern part of the country it is believed that up to 30% of farms have been wiped out. This has meant a huge oversupply of pigmeat on the market in late 2018 going into 2019 and falling prices ahead of the Chinese new year, the time the market is usually at its peak. However, this is expected to be a short-term issue and the oversupply is likely to finish by the second quarter of this year when demand for imports and prices is predicted to increase.

The China Meat Association (CMA) is predicting that output of pigmeat will fall at least 5% in 2019, approximately 2.7m tonnes and it could be as high as a 10% fall, 5.5m tonnes. Also, despite consumers not being at any risk from ASF, there has been a hit on confidence in pigmeat which is expected to lead to a drop of 2% or 1m tonnes in consumption this year. However, despite this there will be an increased demand for imports starting when the overhang of domestic supplies is used up, and likely to be noticeable from the second quarter.

Likely developments in 2019

The increased demand for imports will be welcome news for Irish farmers, especially as prices are also expected to increase. A surge in prices tends to attract speculators who attempt to get ahead of the market with forward purchases. This is fine so long as the market keeps increasing, but when supplies become aligned with demand as they inevitably will at some point, the presence of speculators in the market increase the chance of market collapses as they look for a quick exit.

The relationship with the US will also have both a direct and indirect impact on the market this year. If the trade battles cease and the tariffs are removed, then up to 300,000t of US pigmeat could find its way back on to the Chinese market and a return of US soya at pre-tariff prices would reduce the production cost of domestic production.

Government response

There is no doubt that the government response to control the outbreak was inadequate and ineffective, based as it was at provincial level. They have already begun use of zonal controls, a type of regionalisation that has accommodated a return to trade for many places and a consequent equalisation of prices.

The Government has also accelerated plans to licence hauliers and feed, both leading contributors to the spread of ASF according to CMA and stricter regulatory and hygiene requirements are likely to lead to the exit of more small producers.

Pigmeat is the meat of choice for Chinese consumers, representing 60% of all meat consumption and accounting for almost 3% of the consumer price index (Xinhua news). A strong domestic pig meat industry is a strategic priority and the government has a tradition of intervention in the market to ensure continuity. The impact of the trade dispute along with ASF is likely to lead to serious engagement by the government in 2019 to re-establish domestic pig production capability.

External risks

The rapid spread of ASF across China and difficulty in controlling the spread is a cause for concern across the entire region of southeast Asia. The existence of a grey market in trade of produce is a further risk.

In the EU, the disease was discovered in wild boar in Belgium in October 2018. China’s response has been to ban imports from specific countries that have an outbreak rather than on an EU-wide basis which means that so long as Ireland stays clear of the disease we will be able to continue exports to China.

Irish pig producers have had a prolonged period of depressed prices and the uncertainty of Brexit hanging over the industry is a further stress given the exposure to the UK market and the transport of 450,000 pigs annually to the north for processing. China is the one market in the world that has the size to shape the global trade in pigmeat and Bord Bia is predicting a surge in demand and increase in price from the second quarter of this year. Farmers will be looking to this to provide an overdue upturn in the sector as the year progresses.