Apart from catching up with family and friends and listening to Big Block on repeat with the kids, we spent countless hours during the recent holidays reading and thinking about the devastating impacts of Australia's bushfires and the big trends shaping markets into the new decade. One theme we have written about previously, that is literally close to our heart is food. With the popularity of Netflix documentary, the Gamechangers, and heightened climate change awareness, the meat substitution and vegetarian/vegan movement continues to be a powerful trend shaping the way we (westerners) eat that we want exposure to.

And while the whole finance community (including us) focuses on the the impacts of 2019-nCoV (the Coronavirus) on global supply chains, there is another deadly virus in China changing the way the Chinese eat, that is impacting protein prices, and offers tailwinds to select ASX names.

Background

The Chinese consume a lot of pork. Per capita consumption in 2018 was ~40kg and represented approximately 2/3 of meat consumption with poultry 11kg and beef 6kg per person p.a. It is further estimated that China consumes almost double the global average when it comes to fish/seafood at 41kg/person p.a.

Source: Australian Government Department of Agriculture

And the country (at least in 2018) was largely self-sufficient, producing ~54 Million tonnes, approximately half the world’s pork (only importing close to 1Mt).

Source: Statista

But this is all changing, at least temporarily as the country grapples with African Swine Fever.

China’s pork supplies decimated

African Swine Fever (ASF), despite the name was rumoured to have originated from Russia and was first detected in China in August 2018, in Liaoning Province. Shortly after it was reported to have spread to Inner Mongolia and by December 2018 reached Guandong. By April 2019 ASF was detected in Tibet and Xinjiang in Western China. Within a year ASF had covered most of China and spread to neighbouring pork producing countries, including Vietnam, Cambodia, Korea and the Philippines.

Within China the Ministry of Agriculture and Rural Affairs responded immediately, enacting legislation to fight the disease. Once detected on a farm all pigs within a 3km radius were to be culled and disposed of, with farmers to receive compensation of RMB1200/pig.

The impacts of this were huge, with the World Organisation for Animal Health estimating 200 million pigs to be culled in China ~40%(1) of China’s 2018 production levels, or ~20Mt. The effects of which are likely to be experienced over several years. Experts suggest the market won’t be close to rebalancing until at least 2025.

General Impacts

• China pork price: At the start of the ASF epidemic Chinese pork prices were ~RMB20/kg. By June 2019 prices had crept to ~RMB24/kg before rocketing by September to be up >80% at ~RMB38/kg. In October it spiked to ~RMB50/kg before settling to ~RMB45/kg in December.

• International pork prices: China increased imports of pork by ~80% in 2019 to 2.1Mt, Brazil and Australia being 2 key beneficiaries of the volume which has led to rising global prices. The Australian pig industry is focused primarily on domestic production with only ~10% of production (pre 2019) exported. In some areas over the hook pig prices have increased ~50% from ~AUD2.50/kg to >AUD3.50/kg. European prices are also up about 30% over 2019 with increased exports.

Source: Eurostat

• Other protein demand and prices: Without completing a China wide survey of protein intentions we can’t be precise about the exact substitution occurring however price increases of chicken, beef and other proteins provide strong evidence of substitution. This may also be creating an additional factor in balancing global markets for beef and poultry. Within China the prices of chicken, beef and mutton were all up ~20% by September 2019. Outside China Brazilian beef prices are up ~40%. China buys ~40% of Brazil’s beef exports and that number is increasing. US 90CL (Chemical Lean) imported beef indicator, a benchmark for frozen manufacturing beef into the US, measured by Meat and Livestock Australia (MLA) shows the impact on the US with the indicator reaching AUD8.40/kg in November from ~AUD6.00/kg a year earlier.

Source: Beef Magazine

• Pig Feed Demand: Chinese pig feed rations on average contain ~5% fishmeal, 20% soymeal and 70-75% corn. ~65% of global fish oil/fishmeal is used in aquaculture with ~25% used in pig feed. Hence the drop in pig production could lead to a decrease in near term fish oil/fishmeal demand, easing its cost. In 2018 Chinese consumption accounted for 25% of global corn consumption with production almost solely within country at 260Mt of production. It is estimated that ASF could wipe out ~40Mt of Chinese corn consumption (15%). China also accounts for ~30% of global oilseed consumption and 50% of imports. Demand for oilseeds and soybeans have been materially reduced by ASF with world prices expected to remain low until a supply response occurs, at a time when China is also increasing domestic soybean production.

Chinese Soybean imports January to June 2019

Source: UN Comtrade

• Inflation: With China pork prices more than doubling and pork’s significance in Chinese diets, it’s no surprise to see food inflation at ~20% and CPI hit 4.5% in November. This is the first time since 2012 CPI has been >4%. With benign inflation globally it is interesting to note CPI at 8-year highs in the world’s second largest economy.
  

Source: Zerohedge

ASX Agribusiness Impacts – Chester Investable Universe

With no ASX listed pork producer we can’t get direct exposure to the pig price increase in Australia however below we revisit our universe of Agribusiness opportunities and discuss likely impacts.

Additional Impacts

• WH Group (0288.HK): Given the Chester High Conviction Fund has the ability to invest in select names within Asia, Hong Kong listed WH Group is worth mentioning. It is a previous holding of CHCF. WH Group is the largest pork company in the world and produces 3.4Mt of meat (2018 level) from facilities in China, US and Europe. Although ASF has impacted near term profitability in China (with benefits to global operations) longer term ASF is expected to be extremely lucrative for corporate producers like WH Group. This is because despite compensation payments, many small producers simply can’t afford the increased investment required in cleaning facilities, general pig hygiene, and other biosecurity measures to deal with ASF longer term. Hence market share over time shifting to larger corporate players.

• Wellard (WLD.ASX): Has experienced a disastrous 5 years as a listed entity and is only now cleaning up its balance sheet after switching CEOs mid-2019. Despite being too small for the fund, as a large cattle exporter, it may be an interesting company for micro-cap managers to review.

• Woolworths and Coles (WOW & COL ASX): ASF, coupled with the tragic impacts of the bushfires could see the supermarkets experiencing food inflation.

Food for thought