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.

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	Change	yoy%
Meat production	MMT	39.1	na	-2.1
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

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 zhue.com.cn 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 zhue.com.cn 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," zhue.com.cn 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.

Zhue.com.cn 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 Zhue.com.cn

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 zhue.com.cn 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.

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.