Corn tests USD 4.30/bushel after China releases data on pig farming

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     Porto Alegre, December 22, 2020 – China has become a fundamental variable for the global meat sector in the past five years and reached the peak of transformation in the flow of international trade in 2020. The dependence on soybean imports is a major factor for this commodity, however, it has gained impressive space with the advance of pork purchases. Now, a new environment is opening up for both the meat sector and the grain market due to the data that have been reported by the Chinese government this second semester on the recovery of the local pig industry.

     Pig farming has a cycle of nearly two years, from the birth of a matrix to the meat production. The ASF epidemic lasted for several years in Asia and found its peak in 2019 and 2020. All countries in southern Asia and part of Oceania were hard hit, and the disease spread to Russia, reaching Eastern Europe, where it is currently active. ASF requires the killing of affected animals and, in China, many matrices have been hit causing a sharp cut in the herd from 50.5 million in 2014 to 27 million in 2020, according to USDA.

     USDA has made this assessment of the Chinese herd since the beginning of the ASF epidemic and projected this cut in the number of matrices in the country. Its last published evaluation was last October, when it evaluated the herd of matrices at 27 million head and projected for 2021 a start of the recovery to 31 million head, which is a possible scenario within the swine cycle and its ability to recover.

     At this point, a drastic conflict started with one more piece of information from the Chinese government versus international assessments. Over the year, China has imported extraordinary volumes of beef and pork. Brazil, Europe and the United States took advantage of this Chinese moment, and Spain became the largest pork exporter to China. Despite this, pork prices in China continued to increase sharply this year. However, in this second semester, ASF cases practically disappeared in the region and there was a movement to reactivate investments in the country’s farms. Last week, the Chinese government made this release:

     This week, the Ministry of Agriculture and Rural Affairs of China said that the national stocks of live pigs and matrices keep growing in the country and may reach normal levels in the first half of 2021. According to the Ministry, the stock of matrices surpassed 41 million head at the end of November, while the live pig herd exceeded 400 million head. The herd of pigs and matrices reached more than 90% of the levels seen in normal years, the ministry said.”

     It is not a question of disagreeing with the country’s production capacity of recovering, in less than a year, 90% of its herd lost by ASF, but the discussion in a survey released in October by USDA on 27 million matrices and another published in November by the Chinese government pointing to 41 million head. This is a huge difference which is a determining factor between the trend to continue importing large volumes at least for the next 2 years or drastically reduce its global pork purchases, in particular.

     Pork prices in the international market started to fall rapidly and gave a not very favorable signal. However, the big test for this information is in domestic prices in China. If pork prices go up again, as well as live pig prices, it seems clear that the herd numbers are not yet consolidated to meet the entire domestic demand. If prices continue to fall and imports actually decline, there are more pigs in the Chinese market. Owing to this conflict of information, there is an increase in the insecurity of the meat market for 2021. It is possible that this kind of information, on a quickly growing Chinese herd, begins to slow down investments in exporting countries, that is, starting with the cut in the number of matrices for 2021/22.

     The other side of this new situation created with Chinese pig farming data is the grain market. The other huge information conflict that exists is on China’s carryover stocks. As we have evaluated, USDA disclosed really huge corn stocks in China, 190 million tons, but at the same time it increased its import projection.

     If the Chinese herd is recovering at such a speed, the production system is certainly improving. At this point, consumption of soymeal, corn and wheat may skyrocket in the next two to three years. If the corn stocks released today do not reflect reality, China’s purchases of wheat and corn may sharply rise. Moreover, that could greatly leverage new large volumes of soybean imports due to the rising demand for soymeal.

     Prices on the CBOT last week have gained new strength to test new levels supported by this environment of information about the Chinese pig herd. On the one hand, this directly affects the global flow of the meat sector exports, on the other, it ends up generating a more accentuated and speculative environment in the grain market.

     Agência SAFRAS Latam

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