Grain companies expect rising demand for soybeans

Archer Daniels Midland and Bunge feel other countries will need soybeans to fill the pork gap caused by African swine fever in China

Two of the world’s largest grain companies say the outbreak of African swine fever in China will eventually be good for their bottom lines, but they differ on when that will happen.

Juan Ricardo Luciano, president of Archer Daniels Midland, told investment analysts during a conference call on the company’s first quarter results for the year that the disease will reduce China’s 700 million head of annual hog production by 20 to 30 percent.

“That’s about the size of the U.S. production,” he said.

“That’s a lot.”

The dramatic reduction in China’s hog herd has resulted in reduced soybean meal demand and crush margins in that country.

ADM has a 25 percent stake in Wilmar, which is tied with COFCO as China’s top soybean crusher, processing 15.9 million tonnes of the crop in 2018, according to a Bloomberg story.

But the company has other crush facilities all over the world and they could benefit from China’s slumping hog herd.

“China will clearly need to import substantial amounts of pork and likely other meat and poultry to satisfy demand,” said Luciano, according to a Reuters’ transcript of the conference call.

“This could boost soybean meal demand in regions where our oilseeds business has a strong presence, particularly North America, Brazil and Europe.”

Luciano expects the increase in soybean meal consumption in the United States, Europe and South America to happen in the second half of 2019.

Greg Heckman, chief executive officer of Bunge Limited, shared Luciano’s optimism about future soybean meal demand.

“Animal protein will expand at some point and that will be outside of China, where the majority of our crush is,” he told investment analysts listening to the conference call.

“That should be good for meal demand.”

But Heckman said Bunge is “taking a measured approach” when forecasting the timing of that demand because it is based on the hog life cycle.

“We have got to send the price signals to the market and then get the animals in place to create the demand and we think that’s beyond 2019,” he said.

“That’s the thing that makes the timing tough and that’s why probably those tailwinds are farther out.”

Luciano forecasts a 10 million tonne deficit of pork protein in China. He believes four million tonnes of that may be substituted by beef and poultry. The rest would be filled by imported pork.

He anticipates there will be accelerated weight gain in the existing global hog herd and that means increased consumption of soybean meal.

“I cannot say that today we have seen a significant spike in our demand, but we see our customers getting ready to do that,” he said.

Luciano believes that will improve ADM’s crush margins, which are already above US$1 per bushel.

He was asked if rising soybean prices will eat into those margins. Luciano said he doesn’t think a trade deal between China and the U.S. will elevate soybean prices as much as grain, ethanol and pork meat prices.

The world is awash in soybeans and ADM estimates that ASF is going to reduce annual Chinese soybean imports to 85 million tonnes from 96 million tonnes.

That is in line with a recent U.S. Department of Agriculture estimate calling for 84 million tonnes of Chinese imports in 2018-19 and 83 million tonnes in 2019-20, down from 94 million tonnes in 2017-18.

Luciano believes that in the long-term ASF will be a net positive for crushers like ADM because it will lead to a consolidation of China’s pork industry.

The ASF crisis is more acute in small, backyard Chinese hog farms where feeding leftovers is a common practice.

He believes a lot of those small farms will be eliminated, leaving the larger operations that are more likely to be feeding soybean meal to their animals.

“So, short-term, choppy; long-term, positive,” said Luciano.

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