By Simon Quilty
I am of the opinion that the Chinese Government is about to start a major pork buy program that will see large quantities of US pork be exported to China with or without duties – this program could be in place for many years to come.
Eight months ago on August 16th after the announcement of the second outbreak in Henan province I wrote ‘at times I am amazed how quickly changes in global meat markets can occur and the outbreak of African Swine Fever in China is one of those moments that can take your breath away – it is unfortunately at the expense of one market that creates the opportunity in other markets’.
My thoughts have not changed and the China Government buy program that is now unfolding is likely to be the largest protein buy program in the history of the US pork exports – far surpassing the last buy program of Blue-ear in 2007/8 – with significant global ramifications for beef, poultry and sheepmeat demand.
Some key indications that this possibly is already underway – last week US pork export bookings to China surged by 73,779 mt up from 22,674 mt the previous week – this is the highest weekly pork export volume to China in six years.
China hog prices have jumped 25% in recent weeks and China inflation is on the increase. China’s central government this week has insisted that all domestic frozen pork stocks in meat works and cold stores throughout China be ASF tested ensuring that this product is sold by July 1st – clearing the way for more imported pork storage space.
The rapid depletion of China’s sow herd is pointing to an evolving large protein supply gap that is estimated to be close to 8.2 million tonnes needed in 2019 with estimates on China pork imports at 4.5 million tonnes up 60% on last years imports – US pork exports are expected to be close to 1 million tonnes into China and Hong Kong in 2019 and with rising hog prices this supply gap is growing quickly.
The last major China buy program was back in 2006-2008 when Blue-ear disease impacted China – I believe the lessons learnt back then will give us a good guide today on how this new Government buy program will work.
As stated by the Chinese government in a 2008 report – ‘the purpose of the the import program is to stabilize domestic pork prices and ensure market supply‘ – this was achieved in late 2008 with Blue-ear disease – the time line to achieve the same result in 2019/20 with ASF is likely to take years not months.
How would a new China Government pork buy program look?
The following are my thoughts on how a China buy program would look:
- Key alliances will be formed between countries and individual companies to ensure that a commitment on volume (not necessarily price) will occur over the next several years – the most obvious supply countries being US, EU, Canada and Brazil who make up 90% of global pork exports.
- Product exported is more likely to be as carcasses than as individual whole muscle cuts as the cost of de-boning these carcasses in China would be considerably less than in the US and/or Europe – a three way cut carcass is most likely for ease of preparation and packing.
- The other advantage of exporting carcasses is that under USDA reporting requirements carcasses are exempt – so that any export sales would remain unknown for at least 2 months until the regular monthly US export data becomes available – providing a certain amount of anonymity to dedicated US suppliers in a China buy program.
- Ractopamine free dedicated export kill facilities are likely – whose whole purpose will be to supply the China buy program.
- Duties will be non existent under a China Government buy program – the 62% duty will no longer apply – the reason is simply why would the Chinese Government apply duties to themselves? In short, government imports are exempt from tariffs.
- Depending on the import volume, which I imagine to be large, then a China buy program will require significant storage space within the US and China – this might well see shortages of space for other products and other market participants as China destined frozen pork takes priority over local US production.
- In addition, a China buy program will see the need for large quantities of refrigerated containers, shipping vessel space and trucks to distribute throughout China – thereby ensuring an effective cold chain storage supply system – in some instances any additional cold storage capacity required may still need to be built in coming months.