How The African Swine Fever Crisis Could Disrupt Global Food Companies
With a lot of notable trends in the market today from the yield curve, tariffs, recession risk and swings in the oil price African swine fever may seem like an unimportant topic. Yet its impact could be increasingly important for the global food supply chain, as the current epidemic in Asia plays out. Some see dramatically reduced global pork supply, raising prices of both pork and other protein substitutes including chicken and beef. The fact that the outbreak has so far been centered on China matters, because China typically produces, and consumes, about half of the world’s pork.
What Is African Swine Fever?
African swine fever kills pigs and has no treatment or vaccine, though clinical trials to develop a vaccine are ongoing. The disease is not harmful to humans. In fact, if a pig dies of African swine fever, it’s meat can still be safely eaten according to guidelines. It broke out at a Chinese farm last August. However, it is no longer confined to China with cases now reported in Poland, South Africa, North Korea, Mongolia, Cambodia and Vietnam, though pork production in these countries is far less significant than in China. The disease can be hard to control: wild boar can spread it; it can be present in animal feed; and it can be spread by global tourism. Understandably the U.S. Department of Agriculture has recently heightened its monitoring and inspection efforts to prevent the disease spreading to the U.S..
The impact of the disease has been significant. 114M metric tons of pork are produced annually with China accounting for almost half of the market. So the fact that China is the primary source of the outbreak is problematic. Official estimates suggest only a small portion of Chinese pigs have been culled due to the outbreak, but unofficial estimates suggest a potential larger problem.
Rabobank estimate China’s pork production may fall by a third as a result of African swine fever. If correct, that would be a major impact on the global food supply chain. Plus, herds may take time to rebound given measures in place to prevent further infection. It takes 6 months to raise a pig for slaughter following a 3 month pregnancy In fact the current culling of herds can increases in pork supply temporarily as pigs are slaughtered earlier and in greater numbers than usual. That temporary supply boost could conceal the longer term price move.
The Market Reaction
Lean hog futures are currently pricing in a 12% price rise for June 2020, while whey exports, often used in pig feed, are down significantly. Of course, beef and chicken consumption could also benefit from increased demand as pork becomes more expensive and other proteins are substituted for it.
The market reaction has been varied so far. Currently, major U.S. protein producer Tyson Foods is up approximately 50% for 2019 so far, though they aren’t seeing any benefit yet, the CEO stated “It is difficult to predict when African swine fever might positively impact our pork business. However, we believe any financial benefit will likely occur in late 2019 or later”. Chinese pig breeder and processor Muyuan Foods has since its shares almost triple over the past 12 months as African swine fever could boost profits. On the other hand, the prospect of increasing pork prices is a concern for some investors in Chipotle, a purchaser of pork.
Producers in regions unaffected by African swine fever are well positioned to benefit from this trend as they can benefit from firming prices without enduring the major disruption impacting Asian producers. However, if significant culling continues as the disease spreads, then the disruption to global food supply chains could prove significant over the coming months.