Insight: Hog industry worldwide getting slaughtered in trade war

Seaboard

26/10/2018 16:34

(Updates to add comments from Smithfield Foods CEO in
paragraphs 9 and 10)
    By Tom Polansek, Hallie Gu and Ana Mano
    BEIJING/CHICAGO/CARAMBEI, Brazil, Oct 26 (Reuters) - Ken
Maschhoff, chairman of the largest U.S. family-owned pork
producer, has watched profits fall as trade tensions rise
between the United States and China.
    His company, The Maschhoffs, has halted U.S. projects worth
up to $30 million and may move some operations overseas.
Investing in domestic operations now would be “ludicrous" as
China and others retaliate against U.S. agricultural goods,
Maschhoff said from the firm’s Carlyle, Illinois headquarters.
    Across the globe, Chinese pig farmer Xie Yingqiang sent most
of his 1,000-pig herd to slaughter in May to limit losses after
Chinese tariffs on U.S. soybeans hiked feed prices and left him
unable to cover his costs.
    "It did not really make sense to keep raising them," said
Xie, from eastern Jiangsu province.
    The duelling salvos of the U.S.-China trade war are landing
particularly hard on the pork industries of both nations – and
spraying shrapnel that has damaged other major pork exporters
such as Brazil, Canada and top European producers. In contrast
to many industries that trade war has divided into winners and
losers, the world’s pork farmers and processors are almost
universally shedding profits and jobs from a crippling
combination of rising feed costs and sinking pig prices. 
    The key reason: The trade war came at precisely the wrong
time, after a worldwide expansion to record pork production
levels on the expectation of rising meat demand and low feed
prices from a global grains glut.
    In the United States, meat companies such as Seaboard
Triumph Foods  SEB.A  and Prestage Farms have spent hundreds of
millions of dollars boosting U.S. slaughter capacity by more
than 10 percent from three years ago to nearly half a million
hogs daily.
    Just before trade barriers went up, the U.S. Department of
Agriculture (USDA) predicted in an April analysis that global
supply growth would outpace demand this year, sparking “fierce
competition and lower prices.” Tariff battles accelerated those
trends by shutting off export markets, raising feed prices and
upending regional supply-and-demand dynamics that underpinned
industry profits.
    "As this trade war has heated up, it's made the trade with
China very difficult - to even stopping at various points -
because the tariff that's been imposed makes it not viable,"
Kenneth Sullivan, chief executive of Smithfield Foods  SFII.UL ,
the world's largest pork producer and a division of China's WH
Group  0288.HK , told Reuters in an interview Friday.
 urn:newsml:reuters.com:*:nL2N1X60TQ
     "We're keenly interested in the U.S. and China getting it
resolved," Sullivan said, adding that expansion of the U.S. pork
industry had also hurt profitability. "Certainly U.S.
agriculture has a lot at stake, and China, to the extent that
they're on the surplus end of the deficit, has you can argue
more at stake."  urn:newsml:reuters.com:*:nL2N1X60TQ
    U.S. pork faces retaliatory duties of 62 percent in China
and up to 20 percent in Mexico, slashing demand from two top
U.S. pork export markets and contributing to a mountain of
unsold meat in cold storage.
    The White House did not respond to requests for comment.
    The USDA said in a statement that pork producers soymeal
costs have declined because of a surplus of domestic soybeans
that China is no longer buying. The Trump administration is
working to increase opportunities for U.S. agriculture with the
European Union, Japan and the United Kingdom, the agency said.
    In China, tariffs on U.S. soybeans and an outbreak of
African swine flu have driven farmers to send hogs for an early
slaughter, exacerbating a glut that followed the rapid expansion
of more efficient, large-scale farms in recent years.
 urn:newsml:reuters.com:*:nL4N1QP25P 
    Higher domestic supply and rising imports from other
suppliers, such as Spain and Brazil, has compensated for the
slide in U.S. pork imports. But an African swine fever outbreak
this year has added to the problems of China’s pork producers.
More than 40 cases have been reported in 13 provinces so far,
and restrictions on hog transportation to control the disease
have resulted in a glut in some northern provinces and a
shortage in the south.  urn:newsml:reuters.com:*:nL3N1X2196  urn:newsml:reuters.com:*:nL3N1VS6MP
    Brazil’s pork industry has suffered higher feed prices
partly because farmers now must compete with major Chinese
soybean buyers who turned to Brazil to avoid tariffs on U.S.
beans.
    In Canada, the world’s third largest exporter, producers’
fortunes have fallen along with the U.S. because their prices
are tied to that much larger market. In August, prices fell 31
percent less than the previous month, according to data compiled
by Hams Marketing Services.
    Manitoba farmer George Matheson now expects to sell his
about 250 pigs for C$115 per head - well short of the C$150 it
costs to raise them.
    "I had a hunch this would not be a good thing," his said of
the trade disputes.
    
    RISING COSTS, FALLING PROFITS
    Many farmers in China are searching for cheaper protein-rich
ingredients to replace soymeal, such as rapeseed or yellow peas.
 urn:newsml:reuters.com:*:nL2N1W421N  
    "Everything I use is becoming more expensive,” said Yu
Shiqian, who raises 1,800 hogs in northeastern Liaoning
province. “Only the hog price is declining." 
    Big producers are also being hit hard. 
    Hong Kong-based WH Group  0288.HK , the world's top pork
producer, which also owns U.S. giant Smithfield, warned earlier
this year that its biggest challenge is the oversupply of meat
in the United States and uncertainty over trade tensions.
    Top Chinese producers Muyuan Foods Co Ltd  002714.SZ ,
Guangdong Wens Foodstuff Group Co Ltd  300498.SZ  and Beijing
Dabeinong Technology  002385.SZ , reported their worst earnings
in years in the second quarter due to weak hog prices. Dabeinong
also blamed high raw material prices for eroding margins in its
feed business.  urn:newsml:reuters.com:*:nL3N1VC1PT 
    Xie had hoped to rebuild his herd after the summer but
instead “decided to stay away from the pig business for a
while.” 
    "At least I can guarantee I don't lose money this way,” he
said.
    
    A ‘RED YEAR’
    In Iowa, the top U.S. pork-producing state, trade disputes
will cause hog farmers to lose $18 per head, or $800 million in
total revenue from August 2018 to July 2019, Iowa State
University economists predicted in September.
    For The Maschhoffs, the estimated loss equates to $100
million.
    “We were going to make money in ‘18 and ’19, and now we're
going to have a red year,” Maschhoff said.   
    The company considered investing in China, Eastern Europe
and South America in recent years but shelved the plans because
they could more efficiently raise pigs in the United States.
    "We're starting to scratch our heads and say, 'Did we make
the right decision?’" he said. 
    Producers have scaled back expansion plans because of the
trade war, said Barry Kerkaert, a vice president at
Minnesota-based Pipestone System, which annually sells farmers
about 250,000 sows. 
    In Lone Rock, Iowa, a town of about 200 people, Roger
Cherland raises 3,000 sows. Housed in long barns, the swine
jostle for space next to feed bins topped off by machines.
The Cherlands’ hogs fetched about $40 per hundred pounds in
August - about $20 less than their break-even price.
    "We've got way too many pigs right now,” Cherland said of
U.S. farmers.
    
    A RUN ON SOY IN BRAZIL
    In Europe, big pork exporters such as Spain and Germany,
have made some additional sales to China and Mexico since the
trade wars escalated this year. But the new sales have not been
enough to support EU prices because of expanded domestic supply
and because China bought less pork earlier this year than in
past years.
    Pig farmers in Brazil, the world’s fourth largest producer
and exporter, also might have been well-positioned to capitalize
on a U.S.-China trade war by boosting sales to China. But that
has hardly offset the damage from higher feed prices and a host
of domestic problems that are hurting exports, driving up
domestic supply and slashing prices.
    Russia, which until recently bought nearly 40 percent of
Brazilian pork exports, imposed a ban in December after
discovering traces of the prohibited food additive ractopamine.
And the European Union banned imports from 20 Brazilian meat
plants, mainly poultry suppliers, due to alleged deficiencies in
the nation’s health inspection system.
    Brazil’s pig farmers normally can buy cheap local soybeans,
a key ingredient in animal feed, because the nation is the
world’s second-largest soy producer - but now they pay record
prices in part because of the rush of Chinese buyers. 
    Wilant Boogaard, a hog farmer in Paraná, operates as a
member of a cooperative, a scheme that guarantees his production
costs are covered by an associated meat processor. 
    But as partners in the processing business, the
cooperative’s farmers have a 40 percent stake, leaving them on
the hook for losses. 
    "The meat-packer is losing money," he said. "If we manage to
survive, it will be a great thing.”
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The world's top ten pork producers    https://tmsnrt.rs/2N8uNYR 
US farm product exports by value in 2017    https://reut.rs/2LbNOb9
China's soymeal prices hit record highs    https://reut.rs/2OSUahD
China soymeal vs U.S. soybean price interactive    https://tmsnrt.rs/2OYJRbU
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Tom Polansek in Chicago, Hallie Gu in Beijing and
Ana Mano in Carambei, Brazil; additional reporting by Nigel Hunt
in London and Michael Hogan in Hamburg; Writing by Josephine
Mason; editing by Lincoln Feast, Simon Webb and Brian Thevenot)
 ((Josephine.Mason@thomsonreuters.com; +86 10 66271210; Reuters
Messaging: josephine.mason.reuters.com@reuters.net))