China exports key to North American hog sector profits

Chinese producers liquidated herds because of higher feed costs and now soaring pork prices are attracting imports

DES MOINES, Iowa — China watcher Dermot Hayes is betting on booming Chinese demand for imported pork, which should create good prices for hog farmers.

Chinese government policies have created a production shortfall that the giant pork-eating nation can’t fill this year.

“The market will be good this fall, that should stay around for a year, then start fizzling out,” said Hayes, an Iowa State University agricultural economist.

Hayes said the U.S., Canada and other pork exporters are doing booming business with China because of its manipulation of corn prices two years ago, which drastically slashed hog profits.

The Chinese government set a base price of $9.50 per bushel for domestic corn to support grain farmers. The policy helped grain farmers, but hog producers lost so much money that they began liquidating their herds.

Millions of sows headed to slaughter, further slashing hog prices and exacerbating the problems. Some farmers found sow prices so low that they didn’t even bother to ship them to packers. Instead, they drove them into rivers to drown.

It created the “pigs in the river problem,” which upset people in China’s booming modern cities, such as Shanghai.

The Chinese and provincial governments responded by shutting down thousands of hog farms in areas where urban and rural were getting too close.

U.S. pork exports to China were 116,000 tonnes in the first quarter of 2014, but they collapsed last year, which helped drive down U.S. pork futures and reduce profits.

However, U.S. exports this year to China have returned to 2014 levels, to the surprise of many, and Hayes expects that to continue through the fall.

Some analysts at the World Pork Expo, where Hayes spoke, were skeptical that Chinese demand would continue at the present rate.

However, Hayes has spent years studying the Chinese industry and is bullish about demand until Chinese production rebounds.

U.S. pork was mostly blocked from China last year because of the ractopamine issue but that has faded now that almost all U.S. meat companies have ractopamine-free streams.

Chinese farmers will have trouble quickly expanding production. They are funnelling more gilts into their rebuilding sow herds instead of sending them to slaughter, compounding the short-term shortage of pork.

China has cut its support price for corn to $6 per bu., so returns for hog production are good again, which encourages rebuilding.

As a result, U.S. exports to China should equal five to 10 percent of U.S. production for about a year, which has a huge impact on prices.

“I’ve never seen a change at the top as rapidly as this. It’s happening in front of our eyes,” said Hayes.

“Right now, China is importing about as much as Mexico (from the U.S.). I would bet with anybody (that) before the end of the year, China will have more value than Mexico, so it will become the number one value market.”

However, he warned farmers at the Expo not to get comfortable with Chinese demand. Not only is it volatile because of government economic policies, but geopolitical tensions could wipe it out literally overnight.

“Any day now you could have war break out in the South China Sea over some disputed islands,” Hayes said.

“Can you imagine? You’ve got 30 percent of your pigs waiting to go out to that market and then suddenly it shuts down.”

Canadian hog producers who rely on the U.S. market probably understood that vulnerability very well.

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