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The Independent Investor: Epidemic Pulls Pork Prices Higher

By Bill Schmick
iBerkshires columnist
The African swine fever could cause prices in China to spike 70 percent or more this year. The highly infectious disease is spreading throughout Asia and could lead to a large increase in the price of pork here at home as well.
 
Before you ask, this highly infectious virus, while deadly to pigs, is not harmful to humans. The problem is that when even one pig is tested positive, the entire herd needs to be slaughtered as quickly as possible. There is no cure.
 
The government is taking this epidemic seriously, and well it should. Tough new government rules have been implemented this month in Chinese slaughterhouses and processing plants to identify and test for the virus.
 
The Chinese are the world's largest consumers of pork, accounting for 49 percent of all pork consumed. Domestic hog production, prior to the epidemic, was roughly 700 million pigs. To date, only about a million pigs have been infected, but those figures may be understated. A Shanghai-based consultant company, JCI, is forecasting that pork production will fall by almost 16 percent this year to 8.5 million metric tons. That would leave roughly a 7 million metric ton shortfall in supply.
 
The government's inspection efforts have slowed down business and reigned in demand, at least temporarily. But given the popularity of pork in China, most producers are believed to have large stockpiles of pork supplies, most of which are in cold storage. As such, Chinese producers are dipping into their cold storage supply to satisfy demand and keep prices somewhat reasonable, at least until the second half of the year.
 
Given the severity of the epidemic and the wrath of the government, if the present guidelines and restrictions are ignored, producers and distributors don't dare to buy fresh pigs, kill them, or sell the meat until the government gives them an all-clear. In the meantime, the epidemic has spread to Vietnam and Cambodia, which are also big pork consumers, as well as other nations in Asia.
 
In order to fill China's shortfalls in supply, pork producers in Europe and the U.S. are starting to increase shipments to China. That is despite the fact that U.S. pork exports are subject to a 62 percent tariff, thanks to the tariff war between the U.S. and China.
 
There are also other side effects to the pork crisis. Soybeans are the major source of pig feed. Less pigs means less demand for soybeans. That also hurts U.S. producers. China had already cut imports from American soybean farmers and the virus simply reduces demand for our exports even further.
 
Chinese consumers may also be forced to substitute beef and other proteins for pork. That could send prices of beef higher since China already represents 28 percent of the world's meat consumption.
 
While there have been no known cases of the African virus here, the U.S. is already taking precautions. The National Pork Producers Council recently canceled its 2019 World Pork Expo in Des Moines. Our government also announced increased safety measures to prevent the virus from entering our livestock supply. Most of their effort is focusing on what is called additional attention to "farm biosecurity."
 
About the only silver lining for America in this stormy situation is the present tariff war. As we plan to levy even higher tariffs on just about all Chinese imports, the risk of importing infected pigs has been dramatically reduced.
 
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
 

 

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