As China’s Pig Herd Shrinks, US Gears Up to Fill Global Pork Shortages

Even without a resolution of the China/US trade war, US hog producers and processors could be the biggest beneficiaries of China’s struggle with African swine fever.

China has culled about a third of its huge pig herd since African swine fever was first reported there just over a year ago. Because of China’s dominant position in the hog market, a reduction of that size is bound to cause big global shortfalls in pork supplies. 

The US, with its current abundance of feed and broad and flexible supply chain, may be best positioned among non-Chinese hog producers to increase its herd population to meet rising global demand for pork. US hog producers, for example, have increased the number of breeding sows in the past year at a rate that is nearly twice as fast as the normal growth pace. 

Some USDA statistics don’t fully reflect the opportunities opening up for the global hog industry. The department forecasts only a modest 2% increase in hog production this year for the four largest, non-Chinese producing countries. 

However, in this Featured Insight, we examine some leading indicators of hog industry trends using data from sources in the US, China, Brazil, Russia, Canada, and elsewhere. African swine fever threatens to bedevil the industry for years to come, and producers, especially in the US, are gearing up to take advantage.

Read more:

China’s Shrinking Herd

The Hog World’s Response

Where the US Stands

Soybeans and Feed

Conclusion

Outside of China, the US has the largest population of breeding hogs (left chart), putting the US in the best position to expand future pork production. The chart at right shows the growth in US stocks of both market hogs and breeding hogs. In the past year, the rate of growth in these stocks has picked up considerably. Click on the image to go to an interactive version of the global rankings on the Gro web app.

China’s Shrinking Herd

About half the world’s pigs live in China. Because of African swine fever, however, the country’s herd numbers have fallen 32% over the past year, according to the Chinese Ministry of Agriculture. Replenishing those herds could take years, as China’s population of breeding sows also is down by about a third. It’s unlikely the rest of the world’s hog producers can expand sufficiently to make up for all of China’s shortfall. At the No. 2 position behind China, the US has 8% of the world’s breeding herd, and much smaller players Brazil, Russia, and Canada fill out the top five pork producers.

In 2019, Chinese hog production is expected to fall 20% year over year to 550 million head, its lowest level since 2002, according to USDA PS&D. But the department projects only a 10% drop in 2019 pork production, because it expects lighter and younger swine to be disproportionately affected.

July retail pork prices in China were up 47% year over year, according to China NBS. The Chinese government has said that maintaining low pork prices is crucial to public contentment and it has taken steps to keep a lid on prices, including releasing frozen pork reserves. In addition, China’s pork imports are expected to grow 41% in 2019 from the previous year, the USDA projects. In July, US pork exports to China set a monthly record of 58,000 tonnes, while Brazil set its own pork export record to China of 24,000 tonnes, according to USDA ESR and Brazil’s MDIC, respectively.

According to JCI, a China-focused agricultural data aggregator, Chinese pig prices averaged 17 yuan per kilogram ($1.12 per pound) in July, up 39% from the same month last year. And hog margins have skyrocketed from a loss of 300 yuan per head before the African swine fever outbreak to a gain of 560 yuan per head in July 2019, well above their 10-year average of 180 yuan per head. Such economic incentives, however, cannot solve China’s pork supply problems. For that, the country must look abroad.

Hog production is spread widely around China. Provinces with the greatest production levels are Sichuan and Yunnan in the center of the country, and Shandong, Henan, and Hunan provinces south of Beijing. Click on the map to go to an interactive version on the Gro web app.

The Hog World’s Response

So far, some official statistics don’t show that international producers are responding strongly to China’s pork crisis. According to USDA PS&D estimates, the four largest hog producers after China—the US, Canada, Brazil, and Russia—will increase hog production by only 2% this year, and pork production will grow by less than 4%. By contrast, in the year after the 2014 outbreak of porcine epidemic diarrhea virus (PEDV), hog and pork output in the four big hog-producing countries grew by nearly 6%.

Outside of the US, other big pork producers face constraints in expanding production. In Germany, the world’s second-largest pork exporter after the US, the hog herd has shrunk to its lowest level of this century. Stiff regulations for hog operators have prompted one-fifth of German hog farmers to shut down.

Canada, another major producer, slated to export a total of 1.4 million tonnes of pork this year, faces trade-reducing political hurdles of its own with Beijing. The Canadian Pork Council estimates that the cumulative cost of the June 25th suspension of Canadian pork and beef exports to China is approaching 100 million Canadian dollars.

The US dominates pork production outside of China, triple the next leading producer, Brazil. Each country’s hog industry is expected to benefit from China’s struggle with African swine fever, though none more than the US. Click on the image to go to an interactive display on the Gro web app.

Vietnam produces roughly as much pork as Canada but suffers from African swine fever like China. Nearly all of Vietnam’s pork will be consumed domestically, anyway. Russia is regularly among the top five largest producers, but since it has never exported more than 2% of its pork production, it too is unlikely to come to China’s rescue.

Brazil, which recently signed a pork-export agreement with China, is expected to export a record total of 900,000 tonnes of pork this year. Still, this amounts to less than one-third of the US’ program.

Where the US Stands

No country integrates all aspects of the pork industry as well as the US, from growing and crushing soybeans for feed to producing and processing the hogs. This reduces the risk of geopolitical disruption, and low transportation costs help keep the pork competitively priced. The state of Iowa, for example, is simultaneously the largest hog producing state, the second-biggest soybean producer, and is densely populated with processing facilities. Everything is right where it needs to be.

The 7-million-strong US breeding sow herd dominates the non-Chinese market, with roughly 80% greater production capacity than Brazil, the next leading country. The US has more than twice the number of breeding sows as Germany, more than triple that of Russia, and more than quintuple Canada’s total.

And US producers are building out their pipelines, indicating that the market recognizes the potential for increased hog demand. Over the past four quarters, total US hog inventories rose 2.9% to 75.5 million head, a 43% faster rate of growth than the five-year average.

A closer look into inventory data shows in what ways US producers are expanding and what this means to the hog and pork outlook. Hog stocks can be divided into two groups: those for direct consumption and those for breeding. The former serves immediate consumer demand, the latter serves longer-term consumer demand. Inventories of market hogs, those intended to go directly to the slaughterhouse after feeding, rose 3.0% over the past four quarters, or 40% faster than the five-year average. Most important for long-term sector expansion, the inventory of breeding hogs has grown by 2.4% over the past four quarters, or 89% faster than normal.

Demand for feeder pigs, those which have yet to be fattened to their slaughter weight, also underlines the US industry expansion. Wholesale prices averaged $1.79 a pound this year through July, according to the most recent USDA NASS data. That is the highest for that period outside of 2014, which featured outbreaks of PEDV in the US and elsewhere.

Despite the China/US trade war, US pork exports to China have risen strongly in recent months, hitting a record in July. 2019 is shown as a dark blue line with markers, and is compared with earlier years. Click on the image to go to an interactive chart on the Gro web app.

Except for historical periods of acute production difficulties, the growth in the US hog herd is among the most robust of the past two decades. Breeding-hog inventories and market-hog inventories are both in expansion mode, not just one or the other as in previous periods of market turmoil. This suggests that the US pork production expansion will be spread out over the coming months and years. US producers appear to be planning for a long Chinese recovery from African swine fever and at least a partial resolution to the countries’ trade dispute.

Tyson Foods president and CEO, Noel White, underlined this in a comment accompanying the company’s release of quarterly earnings in August: "The African Swine Fever outbreak continues to take its toll on hog supplies in Asia; however, we have not yet experienced significant benefits to our pork, chicken or beef segments. Given the magnitude of the losses in China's hog and pork supplies, the impending impact on global protein supply and demand fundamentals is likely to be a multi-year event.”

US pork exports to China are already growing, hitting an all-time single-month high of 58,000 tonnes in July, 13% greater than the previous record, set in November 2011. That growth comes despite China’s ban on ractopamine, which is used as a growth-enhancing feed additive in the US. It also comes despite the China/US trade war, which is currently forcing US exporters to reroute pork to slightly less-profitable destinations.

Soybeans and Feed

Prices for soybeans and soybean meal also reflect the hog industry’s pain. In China, lower soybean meal use has pushed wholesale prices of soybeans down 4% this year, following a 12% drop in 2018, despite the China/US trade war, according to Chinese Agricultural Supply and Demand Estimates, or CASDE. Chinese soybean processors, which turn whole soybeans into soybean meal for animal feed, have seen profit margins turn negative.

China imports most of its soybeans, but the government keeps soybean meal imports low to support the domestic crushing sector. Imports this year are forecast at 50,000 tonnes, a tiny fraction compared to China’s expected soybean meal production of 67 million tonnes, according to USDA PS&D. But China’s domestic soybean meal demand is declining. It fell 5% in 2018, the first annual decline since 2006 and the largest since USDA PS&D records began in 1964. For 2019, USDA PS&D projects that soybean meal feed use will be flat. This might be an optimistic forecast, since African swine fever still isn’t contained. In addition, USDA PS&D tends to take a conservative approach to adjusting its estimates, and its figures often lag changes in the market.

By contrast, soybean crushers In the US are enjoying favorable margins, based on low soybean prices from the trade war, and good demand for soybean meal for feed. US soybean crushing margins are at a very healthy $1.00 per bushel in the futures markets and an even higher $1.76 per bushel in the cash markets, according to CME and USDA AMS market surveys.

US soybean futures are below $9.00 per bushel, uncommonly affordable relative to the prices of the past 10 years. Soybean meal futures are also near their 10-year lows. The US is projected this year to crush 58 million tonnes of soybeans, topping the 2018 record by 2.4%.

These charts compare soybean production (at left) and soybean crushing (at right) for the US, China, and Argentina. The US grows all the soybeans it crushes, providing feed for domestic hog producers. By contrast, China imports the bulk of the soybeans it crushes. Argentina crushes nearly its entire soybean crop for meal export. Click on the image to go to an interactive display on the Gro web app.

Other soybean producing countries face more hurdles than the US in steering their domestic crop toward expanding their hog industries. Brazil roughly ties the US as the world’s largest soybean producer, but approximately two-thirds of its crop is exported. Brazil’s export-oriented soybean supply chain, in addition to its relatively small breeding-sow population, restricts the country’s ability to expand hog production more sharply than the US can.

Meanwhile, Argentina crushes more soybeans than any country other than China and the US, but China has until now been reluctant to import soybean meal. Argentina signaled this week it had reached an agreement to export soybean meal to China. But even if this comes to pass, China’s reduced need for hog feed and Argentina’s relatively small hog industry will limit Argentina’s benefits from the African swine fever crisis. Even with poor crushing margins, Argentina is forecast to crush 85% of its 2019 soybean crop, according to USDA PS&D.

Conclusion

The spread of African swine fever beyond China’s borders could further exacerbate pork shortages around the world. In recent weeks, new cases of African swine fever have been found in other countries in Southeast Asia, including Vietnam, Cambodia, and most recently the Philippines, as well as in Hong Kong and Romania. The US, with its broad-based hog and soybean industries, is well positioned to benefit from such shortages. Expanding US pork exports in the middle of a trade war with China may require some creative trade logistics. But as major pork producing countries in Asia and elsewhere encounter shortages and rising prices, current efforts by US producers to expand their production could pay off nicely.