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Swine fever and trade war wreak havoc on China's pork supply

Europe sees demand rise as Chinese buyers cancel order for 3,000 tons of US meat

HONG KONG/DAMME, Germany -- African swine fever and escalating trade tensions are squeezing pork supplies in China and raising concerns that shortages will lead to painful price hikes for consumers in the world's largest pork consumer.

Chinese buyers canceled orders for 3,247 tons of U.S. pork earlier this month, data from the U.S. Department of Agriculture released last week shows, the same week that President Donald Trump ratcheted up the trade war with fresh tariffs on Chinese goods.

Agriculture has been a key issue in trade talks between the two countries. The U.S. has urged China to increase its purchases of American farm products, while Beijing has hiked tariffs on U.S. pork to 62% in two rounds of retaliation since last year.

The recent cancellation -- the largest by Chinese pork buyers in more than a year -- marks a reversal of a goodwill gesture in March when China placed its biggest order for American pork in two years.

Even as the trade friction squeezes supplies, China is grappling with the worst outbreak of African swine fever in 50 years. The virus, which causes no harm to humans, but is fatal to pigs, has been reported in all provinces of China following an outbreak last August. Around 1 million pigs have been culled in an effort to contain the disease. There is no vaccine and analysts say a cure could take years or even decades to develop.

The number of both live hogs and breeding pig stock -- key indicators of future pork output -- slumped more than 20% in April, according to data from China's Ministry of Agriculture and Rural Affairs. The shortage pushed April pig prices up 22.8% versus the same period last year, and analysts predict prices could rise 80% by the end of 2019.

This is a conundrum for the government, as pork is one of the most important ingredients in Chinese cuisine and weighs heavily in measures of the country's inflation rate.

The potential jump in pork prices has prompted Wang Dan, a Beijing-based analyst with the Economist Intelligence Unit, to raise her estimate for Chinese consumer price inflation this year to near 3% from 2.5%. "Given these developments, there is a good chance that pork price inflation could exceed 80% by the third quarter this year," Wang said.

She added that swine fever deaths and hasty culls caused steep declines in China's swine herd at the beginning of 2019, and that many smaller farms have exited the market. The inflation pressures could continue into 2020 and beyond, as farmers will be reluctant to expand production unless a vaccine becomes available, Wang said.

For now, China is working to increase supplies and stabilize prices. Pork imports rose 3.2% in the first quarter of this year to 334,000 tons, and the government released more than 9,000 tons of pork from its reserve on to the market in January.

But even if the government released its entire reserve bought more from abroad, those steps would still fall far short of the country's huge demand for pork, Wang said.

China is estimated to have 320,000 tons of fresh and frozen pork in reserve, less than 1% of total annual consumption. Germany, Spain, Canada, Brazil and the U.S. were the top five pork exporters to China in 2018, but imports only account for about 2.4% of China's consumption.

Barney Wu, an analyst at Guotai Junan Securities in Shenzhen, said the shortage of pork could reach 10 million tons as the swine fever epidemic is expected to peak in the second half of this year. That amount translates to roughly 20% of China's total consumption.

"Pork is almost a fixed demand in China. It's very stable," Wu said.

As the escalating trade war encourages China to shift its pork imports away from the U.S., European producers stand to benefit.

Germany is already the biggest single exporter to China, shipping close to 180,000 tons in 2018. The country's meat-producing northwest has seen prices per kilogram jump nearly 50% in recent weeks, providing welcome relief after a prolonged industry downturn that has seen numerous farm closures.

"I can't remember when prices here have ever climbed this fast, and we take it that the acceleration is mainly driven by China's reduced domestic supply as a result of [African swine fever]," Jana Denecke, spokeswoman for the Pig Producers' Association of Germany, told Nikkei.

The U.S.-China tensions could soon give Germany and other European Union pork exporters an added tailwind. At the latest China-EU summit in Brussels in April, Beijing issued a declaration of intent saying it would treat outbreaks of animal disease in the EU as a regional problem: It would only ban meat imports from the affected region of a country, rather than the country as a whole.

"The principle of 'regionalization' is a major Chinese concession, and undoubtedly reflects the pressure the Chinese government has been under as a result of the surge in domestic prices of pork, given that it is a staple of the Chinese diet," Denecke said.

The development is particularly welcome for Germany, which, although it has yet to experience a swine fever outbreak itself, is next door to countries that have, including Poland and Belgium.

There is reason to believe Chinese demand for imported pork will remain strong in the medium term, according to Pan Chenjun, a senior analyst at Rabobank, a Dutch bank.

According to Pan, Chinese farmers have yet to heed authorities' calls to replenish their herds, as they are worried they could lose their stock again due to the disease. "In theory it requires two to three years to have a recovery of stock, but if you look at other countries' experiences with ASF, we can take it that for China it will take more than five years," she said.

Pan also pointed out a potential downside.

"While it is clear that China needs to import more in the coming years, and that importers will pay a premium, I question whether Germany can supply enough additional pork to make the most of China's growing import demand," she added.

According to a Rabobank estimate, it would take 80% of Europe's entire annual pork production to make up for the shortfall in China's supply.

Moreover, domestic demand is likely to climb in Germany once the summer barbecue season kicks off. Summer temperatures in the country are expected to soar this year, reducing swine fertility and slowing the animals' weight gain, meaning farms will have fewer to sell.

"Although Germany's meat processors have played down concerns that increased Chinese demand could lead to shortages in Germany, we must stay cautious not to overheat the market," said Denecke of the pig producers association.

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