Expanding Chinese pig production is no black swan

Let’s talk about black swans and pigs in this column.

The black swan is a metaphor, while the pigs are real.

When I was in university, I had a summer job in a park in Moose Jaw, Sask. The park has a beautiful creek that was stocked with swans and ducks. One spring, the city bought a pair of black swans.

Wow, who knew there were black swans, I thought. Apparently I was not alone. For centuries the rareness of black swans has been noted, leading to the development of an economic theory.

And like many detailed theories, it has been popularized and simplified so that “black swan” is used to refer to any event that was not expected and changes generally accepted assumptions.

So when soybean prices plunged more than three percent May 18 because Brazil’s currency plunged seven percent due to bribery allegations laid against Brazil’s president in a corruption scandal, well, that was a black swan.

Sure, we knew that soybean prices were under pressure from the record large South American soybean harvest and the expected record large soybean acreage in the United States, but this was a shock.

The impact will likely be short lived, fading as new information on weather, seeding progress and weekly demand figures gain prominence. But on May 18 there were lots of farmers scratching their heads, wondering what was going on to hammer soybeans lower.

The explanation was that Brazilian farmers were slow this season in selling their record crop because they didn’t like the price. The world price was down more than 10 percent from January.

That fall was made worse by the fact that Brazil’s currency, the real, had rallied 5.6 percent since the start of the year. So that make the local soybean price in reals even lower.

When the presidential scandal caused the real to plunge seven percent in one day, it lifted the local soybean price, and farmers rushed to sell.

But all that extra crop coming on the market caused the Chicago soybean contract to fall and caused some American farmers to search for the black swan that was behind this one-day surprise.

But pigs in China, or a lack of them, have had a much longer-term effect on North American hog prices, and the future of China’s pork demand should be predictable.

China’s hog industry is undergoing a major transformation.

It consumes half of the pork produced in the world and has the largest hog herd, but scandals about dead pigs floating in rivers and urban pollution caused the government to launch a major push to end backyard pig production in dense population areas and expand modern hog production in more remote areas.

The new production hasn’t quite kept up with cuts to old style production, leading to a hog shortage and high pork prices.

This has created an opportunity for massive pork imports from Europe, the United States, Brazil and Canada.

Statistics Canada released trade figures for March that show the value of fresh, frozen and chilled pork exports to China is about $128 million in the first three months of this year, up 57 percent from the first quarter of 2016.

It holds the hope that 2017 will carry on the growth of 2016.

In the full 12 months last year, fresh and frozen pork exports to China were about $432 million, more than triple the $144 million shipped in 2015.

And that does not include about $150 million worth of offal, fat and processed product.

But these increased exports are not guaranteed to continue.

The building boom of new large, modern barns continues in China, and the shortage of production is narrowing.

Reuters quoted Feng Yonghui, chief analyst at the Soozhu.com consultancy, as saying that by the summer the sow population should be more than adequate and pig production will likely be in surplus by early next year, leading to hog prices that are below the cost of production.

That will likely lead to reduced pork imports for a year or two, although longer term the import trend should re-establish.

Back in December, our reporter Barb Glen covered a speech by Brett Stuart, chief executive officer of Global AgriTrends in Denver, who warned that when the China pork import bubble bursts, maybe as early as December 2017, it could hit North American pork prices hard.

New slaughter plants are opening in the United States. Part of their pork production is slated for export, but if China cuts back imports, where will the pork go? If supplies back up, prices will be pressured lower.

It would be good for hog producers to keep this in mind in their price risk management plans.

Producers did a great job in 2016 managing marketing and hedging to avoid a predicted price crash in the fourth quarter.

The difference this time is that the danger period could last longer if exporters can’t find replacement markets for the pork China has been buying.

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