Wednesday, August 21, 2019

Why did African swine fever spread so fast in China?

Systemic problems in China may have accelerated the spread of African swine fever, a dangerous pig virus that has no cure or vaccine. According to an investigative piece by Chinese business portal Caixin last month, divergent interests of central and local officials, money worries and "political tasks" created incentives to hide disease reports. Lacking reliable information, farmers panicked and liquidated herds when they heard rumors of disease in their neighborhood. Big regional price differences due to localized pig liquidations and quarantines created strong incentives to truck pigs and pathogens around the country. Traders flouting bans easily evaded authorities--and were often abetted by corrupt veterinary officials who sold fraudulent health certificates and ear tags.

China's first cases of African swine fever (ASF) were reported in August 2018. Within 8 months the virus had spread to all 31 provincial regions, including the remote Himalayan region of Tibet and the island of Hainan. As of July 2019, Chinese officials say the swine herd has shrunk by 32 percent from a year ago. ASF has also spread to all neighboring pork-producing countries, except Thailand. In contrast, the spread has been slower in Europe. Last year Belgium discovered ASF in wild boars, but the disease has not penetrated commercial farms in Western Europe. While ASF cases have been popping up in Eastern Europe, the spread has not been as rapid or devastating as in China.

Why did the virus spread so fast? Caixin reporters point to divergent interests between central and local officials in China's multi-tiered governance system, based on their interviews in several major hog-producing provinces.

Caixin blames an "ostrich policy" of refusing to report disease for creating an atmosphere of uncertainty and misinformation. The reporters found that ASF cases were underreported in many places. They learned from interviews that Shandong Province had its first cases of ASF in Weifang and Linyi prefectures not long after the first officially-reported case in Liaoning Province, but Shandong officials did not report them. Shandong Province has reported only one case in February 2019. Officials suppressed reporting of the disease until April 2019 when they reported that sales by breeding farms in the province were down 41 percent year-on-year. Caixin pointed out that Shandong has clearly more than one case of ASF if sales shrank that much.

Reporting disease became a "game" as local officials worried about budgetary costs of compensating farmers for culling animals and their accountability for keeping the disease under control, Caixin said. All swine within a certain radius have to be killed when ASF is discovered. Compensation of 1200 yuan per head paid to farmers is financed by prescribed shares of central and local funds. However, local officials don't always get funds promised by central and provincial governments, so they worried that they would end up paying for compensation if they declared a disease outbreak.

Another disincentive for local officials was their accountability for allowing the disease to spread. Provinces held "ASF work meetings" where local officials were warned that preventing spread of the disease was their "political task," and they were ordered to ensure "no new occurrences."

A local agricultural official told Caixin that prefecture-level officials refused to accept a report confirming that the ASF virus caused pig deaths. Instead the deaths were attributed to classical swine fever and blue ear disease in reports to provincial authorities. The prefecture-level officials blamed township agricultural officials for failing to vaccinate pigs against these other diseases and forced them to buy a truckload of vaccines that were not needed.

The culling-subsidy game pitted farmers against local officials. A prominent example was the proprietor of Dawu breeding farm in Hebei Province who announced on social media in February that his farm had lost 20,000 pigs to ASF and 5600 animals still alive would have to be culled. His social media post publicly appealed to local government officials to confirm the disease. Several days later, the Ministry of Agriculture posted a notice on its web site for publicizing disease outbreaks announcing that a farm in Hebei Province had 5600 pigs that had had an outbreak of ASF but it did not list the number of sick pigs or mortalities as most such reports do. That was the only ASF case in Hebei Province ever reported on the Ministry's disease notification web site, but anecdotal reports suggest the province's swine herd was decimated by the disease.
The proprietor of a pig farm in Hebei Province posted photos of dead pigs and this banner on social media. The banner says the farm lost 15,000 dead pigs, and "we think it is African swine fever and ask the government to confirm!" 
The farmer who reported Shandong Province's only officially-acknowledged ASF case told Caixin he was cursed by his neighbors for reporting the disease. The farmer was due large amounts of compensation but he only received 20 percent of the promised funds (in eastern provinces like Shandong, the central government pays 20% and the local and provincial governments pay the rest). He said the central government promptly delivered their share of the funds, but the local government dragged its feet on paying for 4500 culled animals and a demolished barn. The farmer claims to be near bankruptcy, having received debt collection notices he is unable to pay.

Caixin suggests that the uncertainty created by the lack of transparency and compensation prompted farmers to liquidate their herds when they heard rumors of a local disease outbreak. Farmers worried that their herd might become infected if the disease was nearby. More importantly, once disease was officially reported in a district a quarantine would be declared, preventing farmers from selling their animals outside the local area. Pigs of all sizes and sows would then be sent to local slaughterhouses, en masse, driving down the local price.

Panic liquidation of herds and quarantines created big profit opportunities for black market dealers who shipped millions of animals from one province to another to take advantage of huge geographic differences in price. According to Caixin, restrictions on transport of animals were "just pieces of waste paper." Where quarantines were in place, traders evaded them by changing license plates on trucks crossing provincial borders, using counterfeit ear tags on pigs, or taking back roads to evade inspectors. Trucking diseased pigs hundreds or thousands of miles was the primary means of spreading the ASF virus nationwide so quickly.

Some criminal gangs took advantage of the information vacuum by planting dead pigs on farms and spreading rumors that they had died of ASF. When farmers panicked and sold off their herds to avoid the disease, gang members posing as traders bought up pigs at steeply discounted prices to transport to other cities where prices were higher. These schemes reportedly could clear out an entire district's pigs "overnight." In May 2019 a local industry association in Shaoguan, Guangdong Province issued a warning about such "Stir-fry Pig Gangs"(炒猪团伙) in their area, but it took two additional months for the Ministry of Agriculture and Rural Affairs to issue a nationwide warning about the gangs.

The long-distance trucking of pigs had been encouraged by a "raising southern pigs in the north" strategy promoted by the agriculture ministry in recent years to mitigate severe pollution problems around major cities and southern provinces. The plan called for closing pig farms in pollution-prone southern regions and metropolitan areas while increasing hog production in Northeastern provinces. The hogs would be shipped hundreds of miles south for slaughter and consumption. In fact, the northeast was the first region to be infected with ASF, and one of the first cases was found in a truckload of hogs delivered to a slaughterhouse in Zhengzhou, the capital of Henan Province. The hogs had been purchased in the northeastern province of Heilongjiang and trucked about 1300 miles south. There are more recent anecdotal reports of pigs trucked from Guangxi and Sichuan provinces thousands of miles to China's east coast.

Chronic neglect of local veterinary capacity also contributed to spread of the disease. Caixin points out that the vice minister of agriculture overseeing disease control--formerly the nation's chief veterinarian--has warned that under-funded, disorganized local veterinary teams using outdated equipment and infrastructure are a weak link and a vulnerability. The chief veterinarian of a prefecture in Shandong said that services at township veterinary stations often exist only on paper. Underpaid veterinary technicians have used their positions to make money by buying and selling ear tags, and corrupt veterinarians have been implicated in several cases of fraudulent veterinary certificates and insurance fraud during the ASF epidemic. According to Caixin, one veterinary official in Shandong interviewed in an April radio broadcast pledged to form a working group, investigate the disease problem, and carry out remediation measures, but local people complained that they never saw any actions.

Caixin is hopeful that ASF will force the government and industry to address weaknesses. In July, the Ministry of Agriculture and Rural Affairs issued decrees calling for overhauls of veterinary services and inspection at slaughterhouses and transportation, and sent out a team to investigate shoddy or corrupt veterinary practices in ten provinces. However, there have been complaints about these same problems for 20 years or more. A decade ago, there was an earlier push to mandate that counties and provinces include funding for veterinary stations in their budgets, upgrade equipment and vaccine distribution, build labs, and require veterinary technicians to pass qualification exams.

Systemic problems inherent in the Chinese system may also prevent a full recovery from the epidemic. Chinese officials constantly juggling various priorities--and always in a hurry to address the latest crisis--never complete any program before another problem grabs their attention. Thus, no problem is ever completely solved, so the same problems fester and keep popping up intermittently.

A veterinary researcher with China's Academy of Agricultural Sciences told Caixin that the country's hog farming sector is now at a point of "life or death," and that the fight against ASF is a protracted war, not a quick battle. He described ASF as a "warning sign" that showed there is much to be done.

Yet top Chinese officials have now decided that soaring pork prices are the most immediate threat to the all-important priority of maintaining "stability." Thus, top leaders have now declared that the virus is "under control" and ordered news media to report only good news about ASF. With the epidemic still a grave danger, the central leadership is now urging local officials to encourage a rapid rebound in pork production and news media are filled with reports of companies and farms making lots of money and restocking their pig barns. Local officials are now being advised to ease up on environmental restrictions and offer loans and subsidies to boost pork production.

Saturday, August 10, 2019

Chinese farmers say subsidies unfair

"Backyard" livestock farmers in China favor eliminating subsidies that go primarily to large livestock farms, according to a commentary posted on many Chinese web sites earlier this week.

The article appeared on swine industry and social media sites with varying titles such as, "The reason backyard farmers oppose subsidies is shocking!" "Upper levels of government were shocked," and "The truth! Why does poverty increase at the same time the State gives more subsidies?" The author was not identified.

The commentary criticized livestock farm subsidies as unfair because the money goes mainly to big farms or disappears in the bureaucracy while poor farmers who need the money get nothing. Small farmers' resentment is magnified when they see expansions by subsidized large farms depressing prices and forcing the small farms out of business. "Although [the money] is for industry [development] and environmental protection, they are tears for poor people," the article complained.

Distribution of subsidies is not open or transparent, the article said, and there is no way for poor farmers who need them to get subsidies. Subsidies are "heard, not seen" and farmers suspect that the money is collected by "a few fat people." The writer complained that livestock farmers need to achieve a certain scale of operation and have personal connections or favor with the government to collect subsidies. Therefore, subsidies should not function as "a road to riches for those people."

The article wondered if the subsidies were a method for squeezing small farmers. Subsidies function as "training for landlords" rather than poverty alleviation, the writer complained. "Since we [small, poor] farmers don't get them, let's eliminate the subsidies for all farmers," the anonymous writer suggested.

The article focuses mainly on subsidies for swine farms that differ from crop subsidies which are usually annual payments based on the land-holding. Most of the livestock subsidies are one-time grants or loans to build farms or acquire animals and equipment. Subsidies for livestock are often proportionate to the size of the operation. They include:
  • A one-time grant for construction of large-scale livestock farms of 500 head or more, ranging from 200,000 yuan ($29,000) for 500-999 head to 800,000 yuan ($115,000) for 3000 head or more.
  • An annual transfer payment  of no less than 1 million yuan ($143,000) to major pork-surplus counties which the author says is "mostly paid to large farms." Regulations say these funds should be used for support of the local pork industry, including subsidized loans for farms and slaughterhouses, breeding and veterinary support.
  • Breeding animal acquisition and subsidies of 30 yuan per head for farms that maintain stocks of native-breed animals
  • Subsidies for automated feeding and water-conserving equipment
  • Subsidized immunizations and insurance for sows and finishing hogs
  • Compensation for culling animals during an epidemic and for safe disposal of carcasses
  • A subsidy for new types of feed (which appears to be for microbial feed additives) that is only available in a few places.
China appears to have kept these subsidies mostly hidden in its notifications of farm subsidies to the World Trade Organization. In its latest notification for 2016 submitted early this year, China listed only 73 million yuan ($1.3 million) in pig-specific subsidies and an additional 179 million yuan for cattle and sheep. These were a tiny fraction of its 1.3 trillion yuan ($186 billion) in total support for its agricultural sector declared in its WTO notification. No one really knows where this money goes or who gets it.

Monday, July 29, 2019

Province Issues Pork Production Recovery Directives

China's Guangdong Province issued a set of pork supply directives calling on city and county officials to ensure pork supplies and stabilize prices:
  • make land available for farms and slaughterhouses; include farms, slaughterhouses, and diseased carcass disposal facilities in annual land use plans
  • ease up on over-zealous enforcement of environmental restrictions on where farms can be built
  • ensure bank loans support farms and slaughterhouses and subsidize loans when feasible 
  • expand insurance for sows and hogs, pay out indemnities promptly, increase payouts, and experiment with "target price" insurance for hogs
  • give aid to clean up and consolidate slaughterhouses using funds from an 80-million-yuan agricultural development fund
  • stop feeding restaurant waste to pigs; develop plans for collecting, transporting and treating food waste; set up demonstration projects by the end of the year
  • expand city frozen pork reserves and use them to adjust supplies and stabilize pork prices
  • cities must form stable supplier relationships with hog-producing districts to fill their pork supply deficits
  • farms designated to supply hogs to Hong Kong and Macao must establish transport corridors with biosecurity supervision to ensure smooth operation and safety of hogs supplied to those cities.
The document requires each city to meet production targets set in a provincial 2018-2020 plan for pork supply. The provincial target was set at 35 million head in 2018, 34 million in 2019 and 33 million in 2020. Shenzhen is the only city with no production target, and Dongguan's target is only 1000 hogs/year. Guangzhou's target is 400,000 head per year, while the largest target is for Maoming at 5.13 million in 2019. Officials have city slaughter targets set in a "Mayor's Market Basket" evaluation system. Cities unable to meet the targets are ordered to set up supply bases to fill their pork deficit. 

The targets seem unrealistic in view of the decimation of the province's production capacity this year. According to another market analysis published last week the spread of the African swine fever virus has stabilized in Guangdong, but the disease is estimated to have wiped out 70 percent of the province's swine production capacity.

Tuesday, July 23, 2019

Chinese Pork Supply Tightens, Officials Encourage Production

Tightness in China's pork supply is becoming evident in July 2019 as shrinkage of the sow herd since last fall reduces supplies of finished hogs. Statisticians from different departments reported widely varying statistics, but all point to substantial shrinkage in supplies. Agricultural officials nervous about rising pork prices have effectively declared a premature victory over the African swine fever epidemic and ordered local officials to subsidize a re-stocking of pig farms to bolster supplies.

The Ministry of Agriculture and Rural Affairs June report on hog and sow numbers in 400 counties showed a 25.8-percent year-on-year decline in the inventory of hogs and a 26.7-percent decline in the inventory of productive sows. The inventory of hogs and sows both fell 5 percent in June. Seven years ago the Ag Ministry stopped reporting their estimate of the actual number of swine so it would not conflict with the number reported by the National Bureau of Statistics--China's official data source--but now the percentage changes clash too.

A "semi-annual report" by the director of the National Bureau of Statistics rural office announced that the swine inventory at the end of June was down 15 percent from a year earlier (see table below for all livestock statistics reported). The Bureau estimated there were 348 million swine at the end of June 2019, down 61.4 million year-on-year.

The Ministry of Agriculture and Rural Affairs also tracks the number of hogs slaughtered monthly at "above scale designated slaughterhouses." The June report shows a 10.2 percent decline from a year earlier. However, adding up the slaughter totals from January-June reports shows a total of 111 million hogs slaughtered in the first six months of 2019, almost the same as last year's total for those months.

The Statistics Bureau reported that 313 million hogs were slaughtered in January-June 2019, down 6.2 percent from the same period in 2018. The Statistics Bureau's slaughter number does not count the number of animals actually arriving at slaughter facilities and is consistently threefold larger than the Ministry of Ag's number.

The Ag Ministry's July 17 news conference explained that a 4.7-percent rise in wholesale pork price during June reflects steadily-growing tightness in pork supply that has become apparent in June and July. The Ministry's chief official in charge of market information said the recent tightness reflects the 10-month biological lag after the first contractions in sow numbers began last October. He expects supplies to get tighter and upward pressure on pork prices to build in the second half of the year.

Another Ministry official claimed that African swine fever is now "under control" and that "orderly" production and sales of hogs can now return to normal. This official said the next step is to give temporary aid, subsidized loans and insurance, and access to land to breeding farms and "above-scale" hog farms in order to restore production capacity. The official also called for enforcing the "mayors' market basket responsibility" program by evaluating local officials on their ability to ensure supplies of meat, fish, vegetables, and fruit.

The Ag Ministry officials reassured the public that meat supplies would be adequate because production of other meats and eggs is increasing, the consumption structure will change rapidly, and imports of pork will increase.

The Statistics Bureau reported a decline in pork output of 1.4 million metric tons (-5.5 percent) in the first half of 2019. Output of poultry meat and eggs were up a combined 1 mmt, while beef output was up a tepid 70,000 mt year-on-year.

First Half 2019 livestock statistics reported
China National Bureau of Statistics
H1 2019
Meat production MMT 39.1
Pork MMT 24.7 -1.43 -5.5
Beef MMT 2.9 0.07 2.4
Poultry meat MMT 9.5 0.50 5.6
Milk  MMT 13.3 0.22 1.7
Egg output MMT 15.2 0.53 3.6
Hog slaughter Million 313.0 -20.75 -6.2
Beef cattle slaughter Million 19.2 0.39 2.1
Sheep/goat slaughter Million 618.5 30.50 5.2
Swine inventory Million 348.0 -61.43 -15.0
Poultry inventory Million 5872.0 223.00 4.0
Cattle inventory Million 92.5 1.12 1.2

Tuesday, July 9, 2019

Livestock Disease Shadows, Imported Genetics are Bottlenecks

A Chinese academic noted the growing importance of livestock to China's agricultural economy, but also warned of the sector's weaknesses: whack-a-mole epidemics, reliance on imports for core inputs, low productivity and high costs.

The comments by agricultural economics Professor Wang Mingli of the Chinese Academy of Agricultural Sciences were reported by No. 1 Business News on the release of his institute's report on challenges and countermeasures for supply-side structural reform in the agricultural sector.

According to Prof. Wang, livestock accounts for 28 percent of the value of China's agricultural output, and perhaps as much as 40 percent (presumably taking into account feeds, fodder crops, and related activities). There is much room for growth, he said, because China's per capita availability of meat, dairy, and egg products is still much less than in developed countries. Prof. Wang said the growing share of China's agricultural sector is irreversible.

In the spirit of the report, Prof. Wang acknowledged barriers facing the sector's development, including rising pork prices that are the "shadow" of disease epidemics such as African swine fever.

Professor Wang recited a chronology of major livestock disease outbreaks in China:
  • 2004--Highly-pathogenic avian influenza ravaged China's poultry flocks, causing large losses for farmers.
  • 2005--Streptococcus Sui broke out in Sichuan Province's swine herd
  • 2006--highly-pathogenic Porcine Reproductive and Respiratory Syndrome ("blue ear disease") first broke out in several southern provinces and spread nationwide, impeding healthy development of the hog industry, pushing China's CPI upward, and attracting the attention of national leaders. 
  • 2011--Porcine epidemic diarrhea virus killed off large numbers of piglets nationwide.
  • Fall 2012--an outbreak of H7N9 caused estimated losses of RMB 23 billion for the country's poultry industry by April 2013
  • 2014--another H7N9 outbreak caused estimated losses of RMB 40 billion for the poultry industry.
  • 2014--an epidemic of a sheep disease, Pestes de Petits, caused a drop in mutton prices and huge losses for sheep farmers. 
  • 2018--African swine fever was first officially reported in China, spreading to every province in less than a year.
Professor Wang claims that the epidemics are "fairly stable" with the improvement of disease prevention and control, but the potential for zoonotics that spread to both animals and humans in some region must not be underestimated. Prof. Wang estimated this year's reduction in pork output at 10 percent, cited farmers' hesitance to restock farms, big financial losses despite expectations of good prices, and stressed the importance of building the veterinary system and ramping up production of alternative meats to fill the shortfall in pork supplies. Prof. Wang warned that disease impacts on livestock markets do not dissipate easily and can last 3-to-5 years or even a decade or more.

Professor Wang also stressed China's reliance on imported resources and lack of international competitiveness in livestock production. 
  • “Three foreign lines” [Duroc-Landrace-Yorkshire] account for 80% or more of the domestic pig-breeding market. Domestic breeds account for less than 20%.
  • White-feathered breeding chicken [genetics] are entirely imported.
  • A “Cherry Valley Duck” breed has over 80% of the duck meat market.
  • About 50% of laying hen [genetics] are supplied from abroad.
  • High quality beef cattle breeds--Simenthal, Limousin, Charlelois, Wagyu, Angus--are from abroad.
  • Holstein and Jersey dairy cattle breeds are brought in from overseas.
  • Four sheep breeds are from abroad
  • In 2017 China's imports of seed for alfalfa were 1,237 mt (up 340% from 2010), clover 2,932 mt (up 150%), fescue 15,202 mt (up 120%), ryegrass 31,279 mt (up 210%).
  • Much of the machinery and equipment for livestock farms is imported. Despite improvements, Chinese equipment is behind that of foreign countries.
With low productivity, China's international competitiveness is weak. Chinese sows produce 16 marketed hogs annually, Prof. Wang said, behind the 20 or more produced in Europe and North America. China's lag in technology, management, and concepts reduces productivity and raises unit costs of China's livestock products, he said. 

China trails behind developed countries, but the potential is great, Prof. Wang insists. He recommends utilizing the strategies of "two kinds of resources, two markets" and "going out" to invest abroad to meet the growing demands of Chinese consumers. 

How High Can Chinese Pork Prices Go?

"How high can pig prices go in the second half of 2019?" asked an article posted on Chinese pork industry site this week. Pig prices have actually gone up surprisingly little over the past year in view of the huge declines in swine numbers reported in China. Prices dipped in February and hog prices really just began to show clear upward momentum in June 2019 in most parts of China. Prices are still falling in southwestern provinces where another panic slaughter phenomenon has been underway.
Chart from showing Chinese hog prices from January 1 to July 2, 2019. Orange line represents northeastern provinces; blue represents national average; gray line represents Sichuan Province.
Nevertheless, rising Chinese hog and pork prices in the second half of the year are an "indisputable fact," said. China's Ministry of Agriculture and Rural Affairs (MARA) reported an average live hog price of RMB 16.72/kg in the last week of June, up 3.8 percent from the previous week. The average hog price in the last week of June was 11.7-percent higher than in the last week of May, and the pork price was up 6.7 percent from a month earlier. Hog prices have been rising fastest in northeastern provinces that were the first and the hardest-hit by ASF a year ago. Prices are also rising in Guangdong-Guangxi provinces where extensive outbreaks occurred in recent months. asked 85 Chinese pork companies how high they expected hog prices to go in the second half of 2019. More than half expected a price of RMB 22/kg--a RMB5 increase from the June average--while 16 percent expected the price to go up to RMB 24, another 20 percent expected a price of RMB 25, and 7 percent expected a near-doubling of the price to RMB 30/kg this year.
Survey of 85 companies by
China's hog and pork prices are still not near record highs, but China could see a string of monthly pork price increases extending into 2020 or 2021 if past pork price spikes are replicated. The chart for hog prices below shows three past episodes of Chinese hog price increases and possible future paths if those historical runs of price increases are replicated in 2019 and beyond. The 2006-08 price spike occurred during China's biggest previous hog disease crisis--PRRS aka "blue ear disease." The next peak in September 2011 followed a PEDv epidemic. A June 2016 peak occurred after a kill-off of sows driven by poor market conditions and environmental regulations that closed thousands of pig farms. In each instance, there were extended runs of monthly increases followed by rapid decline.

If prices followed a string of monthly percentage increases identical to the 21-month episode in 2006-08, Chinese hog prices would soar from their current RMB 17/kg to a peak of RMB 45/kg in February 2021. If they followed the 2010-11 path, prices would peak at RMB 33/kg in September 2020. If prices followed the more moderate pace of 2015-16, the peak would be RMB 23.5/kg, also in September 2020. At the end of 2019 the price would hit RMB 22/kg on both the 2006-08 and 2010-11 paths--the same price 57 percent of the survey respondents expected--and the price would only hit RMB 19-20/kg at the end of 2019 on the slower 2015-16 path.
Future price increases beyond June 2019 replicate monthly increases from 
past price cycles in 2006-08 (red), 2010-11 (green), and 2015-16 (dark blue).
There is no guarantee that the coming pig price cycle will replicate past cycles, but there are several common features of past cycles that are likely to recur:
  • past price increases extended over 15 to 20 months 
  • strings of rapid monthly increases averaging 4-to-5 percent were interspersed with periods of decline
  • each cycle had a sharp peak in price followed by rapid decline in price 
  • peaks and valleys of each cycle were at least a high as those of the previous cycles
The severity of the production decline due to ASF appears to favor a scenario of rapid growth in prices over an extended period like the 2006-08 rise in prices. Indications are that ASF has resulted in China's most severe contraction in pork supplies since the Great Leap Forward disaster in the early 1960s. MARA's report of a 23.9-percent year-on-year decline in the May 2019 sow inventory portends significant declines in pork production that should take hold this year and become more severe in 2021. Frozen pork inventories and shipments from panic-slaughter hot spots have bolstered supplies in the short run, but those will be depleted in the second half of the year. A 10-percent, 20-percent or even more severe reduction in China's pork output phased in over the next two years is possible. Shrinkage of the pork supply suggests an unprecedented rise in prices.

In 2007, China had a 7-percent reduction in pork output that led to a cumulative 150-percent increase in hog and pork prices. Flat production in 2011 led to an 89-percent increase, and a 4-percent decrease in pork output during 2016 led to a 46-percent increase in pork price. Thus, past experience makes it plausible that a 20-percent shrinkage in pork output could send prices upward by more than 150 percent.

A rebound in pork production in response to rising prices could mitigate the size and length of the price surge. In past episodes Chinese pork supply readily bounced back as high prices attracted expansion by farmers: high prices and profit margins prompt farmers to raise a new cohort of sows that produce new litters of piglets to raise to slaughter weight, driving prices back down as fast as they rose. The long run of price increases reflects biological lags in raising a new cohort of sows, gestation and fattening of market hogs. As this cycle begins, big companies with strong biosecurity and access to capital are already maneuvering to expand in this manner, and government officials have promised financial support targeted to large pig farms.

However, it's not clear that big farms alone can expand output as fast as small- and mid-size farms did in past cycles. In past cycles individually-operated farms could expand rapidly via their access to land, minimal overhead costs, and lack of regulation. While many of the big companies aim to expand in the current cycle by incorporating moderate-sized farms using a "company + farmer" strategy, individually-operated farms are still hesitant to expand due to fears of ASF, high feeder pig costs, and lack of cash. A recent MARA survey found that half of farmers were not interested in adding hogs right now. In the face of a pork shortfall, will Chinese officials at the local level maintain their vigilance enforcing environmental curbs on pork farms and bans on swill-feeding? Maybe not, but cascading requirements for biosecurity, manure treatment, bans on swill, and decontamination of feed ratchet the cost structure upward and are bullish on pork price increases.

Pork imports and substitution of other proteins put the brakes on the rise in pork prices. China's pork imports have surged during each of the past three pork price spikes. USDA says China's pork imports hit a record 2.2 million metric tons during the 2016 price spike, and imports are sure to break through this record this year or next. Imports are already on a brisk pace this year, despite very high tariffs on U.S. pork. It doesn't help that China just banned pork imports from Canada, one of its top suppliers of imports.

Of course, pork prices can't be viewed in isolation from other prices. Historically, pork prices don't stray too far from the price of chicken--an important substitute. Beef and mutton are other substitutes but troubles raising cattle and sheep sent Chinese beef and mutton prices soaring far above pork prices a decade ago. As pork prices rise, consumers, restaurants, cafeterias, and processors will substitute other meats for pork if substitutes are cheaper. Trouble is, China's capacity to supply more poultry, beef, sheep, fish/shellfish, and eggs may not fill the deficit. Rising pork prices may drag chicken and beef prices upward with them. A pork price of RMB 50/kg could pull the chicken price up to RMB 30-40/kg. Beef/mutton prices could go higher too. These other meats are also prone to crises. When will the next avian influenza outbreak occur? Will TV reporters discover more chickens soaked in antibiotics or beef made from rat meat?
On the other hand, China's relatively weak economy and general downward pressure on commodity prices could restrain growth in pork prices this time around. The rapid pace of price rises set during the 2006-08 cycle was probably accelerated by global commodity price inflation during those years that leaked into the Chinese economy. The 2010-11 cycle also occurred during a time of high commodity prices, but the more moderate 2015-16 price rise occurred after the commodity price inflation bubble had been pricked. China's CPI rose about 5 percent during the 2006-08 and 2010-11 cycles, but just 2 percent during 2015-16. Prices remain mostly soft in China now--except for commodities facing supply disruptions from disease, weather or army worms--suggesting a moderating influence on this round of pork price increases. China's CPI was 2.7 percent in May 2019--about half the inflation rate in the 2006-08 and 2010-11 cycles.

In summary, the severity of the supply disruption suggests a record surge in pork prices, but the lack of inflationary oomph and resistance to crazy-high prices might prevent a 150-percent price-increase scenario. The RMB22 expectation of hog prices by the end of the year guessed by most pork companies is surprisingly consistent with the historic price paths, but the companies weren't asked whether prices would keep rising next year.

Wednesday, July 3, 2019

China Soybean Revitalization = "Groundhog Day"

Government officials and news media describe this year's soybean revitalization plan as something new, but China has rolled out a continuous cycle of similar plans going back decades. All of the plans aimed to introduce new cultivars, raise yields, expand production, and forge links between farmers and processors, but no significant progress is evident. The tendency of Chinese officials to keep re-booting and forgetting the same old plans in a manner that recalls the movie "Groundhog Day" is perhaps most evident in its unending cycle of soybean revitalization plans.

Nearly 40 years ago, a USDA report remarked, "China will again attempt to expand soybean production in 1980, although past efforts have had little success." A year later, British professor Kenneth Walker wrote, "Attempts to reverse the long-run decline in the production of…soybeans are now being made."

In 2000, Chinese officials began an experiment with the first direct subsidy payments for soybean farmers in pilot areas as a "countermeasure" to gird up farmers facing competition from imports after WTO accession.

In 2002, Heilongjiang Province launched a soybean revitalization plan that included subsidies of 10 yuan per mu for high-oil soybean varieties and 5 yuan per mu for high-protein varieties, improvements in seed distribution, technical training classes for farmers, and arranging links between soybean sellers and buyers. Farmers Daily cheered on Heilongjiang's State Farms and its company front, Beidahuang, as key players in the plan.

Also in 2002, a national soybean seed subsidy was launched by China's Ministry of Finance with cumulative expenditures of 700 million yuan ($84.5 million at the exchange rate that prevailed at the time) over the first 6 years of the program.

In 2007, the China Soybean Industry Association proposed a soybean industry revitalization program that would include soybeans in the national grain subsidy program; "utilize news media" to publicize the "nutritional and safety advantages" of domestic "non-GMO" soybeans over imported soybeans; "fully utilize WTO rules" to strengthen government intervention in soybean markets and regulate soybean importers; launch trade remedy actions; and encourage cooperatives and processors to utilize futures markets.

In 2008, the National Development and Reform Commission issued "Guiding opinion on promoting healthy development of the soybean processing industry" that called for using "various measures" to develop production of soybeans, peanuts and other oilseeds. It called for more technical guidance and "indigenous innovation," encouraged Chinese companies to make overseas soybean investments, and it recommended establishing a commercial soybean inventory system, setting up an "orderly" import security mechanism, and shaping public opinion regarding "healthy oil consumption."

In 2008, China began a "temporary reserve" program that set a floor price for domestic soybeans in northeastern provinces. The program promptly filled warehouses with unsellable domestic soybeans that are still being auctioned off five years after the program ended. The high price for domestic soybeans encouraged even more imports of soybeans.

In 2009, the Ministry of Agriculture launched a pilot "Healthy Soybean Industry Development Mechanism" in two Heilongjiang counties, a region of Inner Mongolia, and the "Red Star" State Farm in Heilongjiang. The program selected companies and local government offices in each locality to promote cooperation between companies and farmer cooperatives, promote use of futures markets, and promote consumption of soybean food products and nutritional supplements.

In 2010, the head of the China soybean industry association wrote an essay in the communist party journal Seeking Truth reiterating his recommendation to build a "non-GMO soybean brand," set up a non-GMO soybean resource protection region, and require importers to purchase equal amounts of domestic and imported soybeans in order to gain permission to import (modeled on a Thai program). (The last recommendation was never adopted).

In 2010, the Ministry of Finance announced a "National healthy soybean industry development plan" with subsidies for soybean seeds set to increase to 400 million yuan in 2008 and cover 40 million mu (2.7 million hectares) of land. The plan promised financial support for propagation of improved seed strains and money for farmer cooperatives and training in technology and management.

In 2014, a "target price" subsidy replaced the "temporary reserve" in a 3-year pilot carried out in northeastern provinces.

In 2016, the Ministry of Agriculture's "Guidance on Soybean Industry Development" called for focusing subsidies on protection regions focused on soybeans and promoting rotations of soybeans with corn.

In 2017, direct payments to soybean producers in northeastern provinces replaced the "target price" subsidy.

In April 2018, provincial and local governments in northeastern China issued "emergency notices" calling for expansion of soybean planting, apparently prompted by the rapid increase in soybean imports during 2017. The soybean subsidy payment was set at 320 yuan per mu in Heilongjiang Province.

The 2019 "Document Number 1" announced a new "soybean revitalization plan" that calls for a 10-million-mu increase in soybean planting this year. This year's soybean subsidy payment in Heilongjiang is expected to be 270 yuan/mt, and Chinese news media are reporting a big increase in soybean plantings this year despite vagueness of the "revitalization plan" and a subsidy that is lower than last year's. Officials are also promising that the government's reserve corporation will step in to purchase soybeans after the harvest, implicitly assuring them of no downside price risk.