34 – Butterflies and Pigs?

10 September, 2019

In popular culture, the butterfly effect is where a very small change in one place can lead to a large change elsewhere. It’s a domino effect where an initial small event triggers a cascade of changes, leading to a larger important effect elsewhere.

 A butterfly event started in China in mid last year. It was an unanticipated outbreak of Asian Swine Flu (ASF). Quickly, it’s become an epidemic, rapidly spreading across China and now into pig populations in Vietnam, Cambodia, Laos and Myanmar. So serious is the ASF outbreak that it will affect sectors in many countries, including Australia’s grains industry.

 In 2018, before the severity of ASF was obvious, China was already the world’s third-largest importer of pork, receiving 7.3% of global imports of pork. The European Union, led by Germany and Spain, were the main suppliers of pork to China. Yet, so serious is the ASF outbreak that, in 2019, China’s domestic pork production is forecast to decrease by at least 30%. The magnitude of this reduction in production is equivalent to the world losing the entire annual supply of pork in Europe. Some analysts even reckon China’s pig herd could be halved from more than 400 million head to about 200 million.

 In August 2019, pork prices in China reached record highs as the ramifications of the ASF epidemic worsened. Since the start of 2019, Chinese pork prices have increased by around 90%. So, to meet its consumers’ need for meat, and place some downward pressure on pork prices, China has increased its imports of pigs from countries that present no ASF risk. Imports of other meats also have increased. Beef exports to China have increased by more than 50%. Over 114kt of beef was exported from Australia in July 2019 — the highest total since July 2015 ― even at a time when many parts of eastern Australia continued to be gripped by drought. Australia’s beef exports totalled $9.49 billion for the 2018-19 financial year, a 19 per cent year-on-year increase.

 What are the implications for Australia’s grains industry?

Chinese demand for meat, including Australian beef, places pressure on meat prices In Australia. China’s demand for Australian beef helps make feeding grain to beef animals profitable, even in the face of grain made expensive by drought conditions in eastern Australia during 2018/19. Expensive grain adds to grain farmers’ profits. This certainly occurred in 2018/19 for farmers in Western Australia. The average mixed enterprise farm business in Western Australia generated an operating profit of $324/ha in 2018/19, and enjoyed an average return on capital of 12.3%, principally due to high prices for grains and better than average crop yields (Planfarm, 2019).

 It’s good news for Australia’s pork industry, provided it remains free of the ASF disease. Imports of pork into Australia will continue to face strict quarantine review and EU pork that previously may have come to Australia is more likely to flow into Asian markets. These conditions create an opportunity for growth in pig production in Australia, resulting in an increased demand for local feed grains. Local grain producers will benefit from additional demand from Australia’s pig producers.

 It’s also good news for Australian sheep farmers as their competitor red meat, beef, is made more expensive, making sheepmeat relatively more attractive. Any upward pressure on sheepmeat prices ensures grain-finishing of lambs becomes increasingly affordable. Again, grain producers benefit from any lift in demand for feed grains from sheep producers.

 The ASF outbreak in China and nearby countries will encourage Australian meat exports to China and thereby indirectly support local feed grain prices as local feed grains underpin local and export meat production. However, China’s ASF issue is not solely ‘good news’ for Australian grain farmers. China’s reduced feed use by its pig industry will cause a reduced importation of feed grains used in China’s pork production. Feed grain exports from Australia to China, such as feed barley shipments, could be reduced. Also the feed grains that other competitor suppliers normally would have sent to China to support its pig production will now flow to other markets, some of which may have been usual outlets for Australian feed grains.

 Key Message

The Asian Swine Flu outbreak in China and nearby countries is greatly reducing their pork production, encouraging imports of other meats, including beef from Australia. Australian meat industries will benefit from the disease outbreak and Australia’s grains industry will experience a range of positive and some negative consequences.

Reference
Planfarm (2019) Planfarm Benchmarks 2018/19. Available at http://www.planfarm.com.au/products/planfarm-benchmarks.html

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