During Q3 2019, Third Bridge Forum investigated the issue to determine implications for investors of the impacted companies. We interviewed multiple specialists from China, the US and Thailand to uncover the true scale and far-reaching consequences of the ASF epidemic. These Interviews provided valuable insights on ASF’s impact on pork pricing and the reality for pork producers operating in China, the US and Europe.
China produces approximately 60% of the world’s pork supply – around 400 million pigs – and is the largest pork-consuming country. The Chinese pork industry is worth a staggering RMB 886 billion (USD 128 billion), and compared with the US and other countries, China’s demand for pork is far more inelastic. Therefore, Chinese consumers are the most likely to be negatively affected by the epidemic. The ASF outbreak, which has now been reported in every Chinese province, resulted in the culling of millions of infected pigs. This jeopardised the market equilibrium for pork; where one kilogram of meat was priced at just over RMB 12 (USD 1.73) in January 2019, it is expected to rise beyond RMB 20 (USD 2.89) in 2020.
Furthermore, China’s ability to increase supply to account for the culled hogs is limited by factory efficiency, factory capacity and livestock productivity. While the US is able to manufacture a single kilogram of pork for RMB 4 (USD 0.58), in China, the same amount of pork takes RMB 6-7 (USD 0.87-1.01) to produce. The difference in cost is a result of a lower cost of feed in the US coupled with highly mechanised and efficient factories that house 2-3,000 pigs producing 11-13 piglets in a litter compared to China’s relatively inefficient 5-10,000 pigs, which produce 8-9 piglets. According to a Third Bridge moderator, who interviewed a number of our specialists in this series, “the hog deficit could be even greater than reported” because while the official statistics in China suggest approximately 1 million pigs have been culled [June 2019], the actual number could be closer to 1.5- 2 times the official count. This means standing stock will be much lower than anticipated, which would further exacerbate pressures on inefficient producers.

The market dynamics within China are also problematic when it comes to increasing supply, as smaller hog farms represent approximately 80% of the market. These individual farmers do not have the cash surplus to invest in biosecurity measures, which makes the threat of ASF putting small farms out of business very real if the Chinese government strictly enforces the biosecurity regulations and continues the culling of livestock. However, a Third Bridge Forum moderator on the ground in China remarked that “the government is unlikely to adopt a softer stance for independent farmers” as this will undoubtedly cause the disease to spread further within the country. Production inefficiencies and the eradication of independent farms raise the question as to how the country will be able to meet the demand for pork given that 20% of its hog herd – the equivalent of 80 million pigs – has been impacted by ASF already.
However, in the short term, there may be a solution in the shape of the Chinese government’s national meat reserve system, which was put in place in 2009 to essentially stockpile pork during times of excess. This stockpile prevents shortages when the supply has been compromised, and ultimately enables the government to regulate the price of China’s favoured protein source. Nonetheless, although in the immediate future consumers should be protected against the shortage in hogs, China’s reserve of fresh and frozen pork only accounts for 320,000 tonnes – around 1% of the country’s total annual consumption. So, while initially, consumers should still be able to purchase pork at a reasonable rate, the government’s stockpiles cannot feasibly control the price of pork for long.
Additionally, large companies operating in China have acted similarly to the Chinese government and stockpiled pork when costs were low in anticipation of the rising pork price in H2 2019. Unlike the national meat reserve, companies such as WH Group (formerly Shuanghui), Wens and Muyuan did not stockpile to regulate prices, but rather to enhance their margins, and while that supply lasts, they should expect to see “significant earnings by selling their stockpiled pork”, according to a specialist from Henan Shuanghui Investment and Development Co Ltd.
Therefore, whilst stockpiled pork may be able to meet the immediate demand, given the magnitude of the situation, Chinese producers will soon need to find a more efficient supply of hogs or resort to an alternative protein source altogether. Given this reality, the Chinese government and pork producers have a couple of options available to them: either import additional pork products from overseas or improve processing efficiency to plug the supply gap.

Although improving production efficiency would enable Chinese producers to generate more pork from fewer hogs, the lack of scalable factories, absence of advanced machinery, abundance of individual farmers and increased charges from slaughterhouses as a result of higher hog prices only makes that solution viable in the long term. Therefore, in the short term, China may have to look at relying on external meat sources. Feasibly, there are two primary candidates for this role: the US or Thailand.
The recent easing of regulations surrounding the import of chicken from Thailand could help China meet the increased requirement for pork substitutes. Following the outbreak of ASF, the chicken industry in Thailand has improved, with China offering Thai producers a fair price. However, in order for an increased supply of Thai chicken to be seen as a solution, Chinese consumers would need to soften their demand for pork as at present it provides 80-90% of the protein in the average Chinese consumer’s diet.
Alternatively, China could seek to source hogs or pork from a more efficient region such as the US or Europe. However, considering cases of ASF have been reported in the EU, namely Belgium, which is geographically close to major pork producer and exporter Denmark, our moderators suggest it is “unlikely China would risk importing infected livestock into the country by increasing the levels of trade.”
Ultimately, these factors are advantageous for vertically integrated, larger US processors such as Smithfields, Tyson, JBS and Seaboard Triumph. Last summer [2018], the ongoing US-China trade tensions caused tariffs – imposed by China on US pork exports – to rise from 12% to 62%.
However, now, given the ASF outbreak reports in Europe and the seeming inelasticity in Chinese pork demand, it would appear to be in China’s best interest to resolve their differences in order to plug the supply gap. If trading between the US and China is increased, then these processors will benefit from additional volume and heightened market prices. They may experience some margin compression but essentially they have flexibility with regard to where and how they capture margin. Of all the vertically integrated processors, China sourcing from the US would be particularly beneficial for China-owned US companies, such as Smithfield Foods, who could continue to escalate their export and import rates into China. During the Shuanghui Group and China’s Pork Processing Industry Interview the specialist explained that the company’s Chinese ownership means Smithfield Foods are “free from the challenges brought by the US-China trade war”, even if China refuse to negotiate better rates of trade.
Nevertheless, while China easing tariffs would be sensible, “it’s more than just pork that is on the table as far as the tariffs and the tariffs discussion [goes]”, according to the specialist from Forum’s Interview on Pork Pricing Dynamics. Essentially, as a result of the wider political implications, it is difficult to predict whether China will ease its US pork tariffs even though this appears logical. In fact, it may choose to explore entirely unexpected avenues, like for instance, sourcing beef from the UK or pork from Russia. Recently, China began to open its beef market to Europe and will begin accepting exports of beef from Britain and Germany. With the recent UK beef deal valued at approximately RMB 2.9 billion (USD 422 million) over the next five years, this could be a sign that the Chinese government are gearing up for the pork supply gap to continue and that they are increasing insurances to prevent a meat shortage in the country while refusing to yield to the US.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
For any enquiries, please contact sales@thirdbridge.com