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Rabobank: ASF to affect markets, trade flow for 3-5 years

China's herd loss to reach 55% by year end as African swine fever continues to spread in additional regions.

China’s herd loss during the first eight months of 2019 will be approximately 50% of the year-ago level, but a slowing pace due to government control measures and reduced farm numbers should put total losses at 55% this year, according to a global report on African swine fever (ASF) from Rabobank.

Pork production, on the other hand, has declined more slowly than herd loss due the large liquidation during the first half of 2019, the report noted. Rabobank expects a 25% decline in pork meat output for 2019, but given the decrease in sow numbers, production in 2020 is expected to result in an additional 10-15% drop in pork production.

“Restocking has been tried on a small scale in 2019,” Rabobank reported. “Some progress has been made, though many have failed. Some new projects in remote regions are under construction, but breeding herd availability will be a key constraint on expansion.”

As expected, China’s pork imports continue to rise. First-quarter 2019 imports were typical, but by the second quarter, pork imports were above typical levels, the report said. Imports in the third and fourth quarters are expected to rise as domestic supplies tighten and as festivals in China spur increased demand.

“To achieve this increased flow at prices that are manageable in China, we believe the U.S. and Canada will need to contribute more materially to China’s imports,” Rabobank said, adding that Brazil also has scope to increase exports to China.

In China, prices of live hogs, piglets and pork meat have all set new records, exceeding a previous peak in 2016. Rabobank said authorities have launched various measures to curb prices, such as releasing reserves and guiding the price ceiling, but to no avail.

“We expect prices to go up further in the next few months, as peak season is approaching,” Rabobank reported.

Further, retail prices for all species are at record levels and are expected to continue to rise.

Regarding feed demand, Rabobank forecasts a 17% drop in China’s feed consumption in 2019. However, this is expected to recover by 8% in 2020.

While hog feed accounted for 54% of China's total feed demand in 2018, Rabobank expects this to drop in 2019 and 2020 to 39% and 38%, respectively. Poultry and aquaculture feed, on the other hand, are expected to gain share as producers switch types of production.

This year, Rabobank said demand is expected to drop by 6% for soybean meal and 12% for feed corn.

On the move

An increase in exports is also expected in other Asian markets affected by ASF. This will increase competition, sending prices higher. Still, Rabobank said prices have already reached an inflationary level, and demand erosion will become more apparent in the coming months, thus “putting a ceiling on pork prices and lifting price for trade in other species.”

In the European Union, ASF outbreaks show no sign of slowing, Rabobank reported. Total EU production was down 1.3% year over year during the first half of 2019. However, the report suggested that second-half production may deliver a small positive for annual 2019 production.

According to Rabobank, Vietnam has lost 18% of its herd since February, with 5 million hogs lost, and that number is expected to grow to more than 7 million — 25% of the herd — by the end of 2019. As such, total 2019 hog production is expected to drop 20% from 2018 levels.

Additionally, the report relayed that early herd rebuilding in northern Vietnam has faced setbacks from recontamination.

“We expect larger, more biosecure farms to be built,” Rabobank said. “In Vietnam and elsewhere, we see the pork supply chain changing rapidly, through the exit of household swine farms, closures of illegal slaughterhouses, new entrants and investments in other proteins.”

The Philippines and South Korea also now have reported cases of ASF, and concern is growing for Australia as a new outbreak was recently reported in nearby island Timor-Leste.

Rabobank said while the Philippines' hog herd is 12.8 million head, only 15,000 have perished so far. Still, pork imports are expected to rise as the country is already a large importer.

South Korea has reportedly lost 10,000 pigs, but Rabobank noted that local media have suggested that the number of affected pigs could be five times greater than this.

Overall, Rabobank said the global implications of the situation are becoming clearer but still remain underestimated.

“Growing pork exports and rising prices will challenge exporters in all regions to find an appropriate balance between increasing production, chasing high prices for exports and supporting local customers,” the bank said.

Rabobank anticipates “relatively unstable market conditions” for the next three to five years -- until biosecurity measures increase substantially, an ASF vaccine is developed, export flows increase materially or other protein supplies increase structurally.

Market recap

December live cattle futures contracts started the week lower but found strength as the week progressed. Contracts closed higher Monday at $110.30/cwt. and Thursday at $110.825/cwt.

November feeder cattle futures followed the same trend but saw larger midweek gains. Contracts closed lower Monday at $141.925/cwt. and Thursday at $142.10/cwt.

Beef cutout prices were slightly lower this week. The Choice cutout closed lower Thursday at $212.06/cwt., while the Select cutout closed higher at $187.21/cwt.

December lean hog futures rallied on Monday to a higher close of $72.60/cwt. but fell as the week progressed. Contract closed lower Thursday at $68.10/cwt.

The pork cutout was mostly higher this week, with the wholesale pork cutout closing at $75.36/cwt. Loins were higher at $68.59/cwt., while hams were lower at $59.52/cwt. Bellies rallied to $132.65/cwt. this week, up from $109.32/cwt. the prior week.

Hogs delivered to the western Corn Belt were slightly higher, closing Thursday at $50.77/cwt.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on Sept. 27 at 77.53 cents/lb.

According to USDA, egg prices were steady, with a cautiously steady undertone. Supplies varied but were moderate to fully adequate. Demand was light to moderate.

Large eggs delivered to the Northeast were unchanged at 65-69 cents/doz. Prices in the Southeast and Midwest were also unchanged at 68-71 cents/doz. and 56-69 cents/doz., respectively. Large eggs delivered to California were $1.11/doz.

For turkeys, USDA said the market was steady to firm, and demand was light to moderate. The price range for hens was 87 cents-$1.00/lb., while the price range for toms was 90-99 cents/lb.

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