Critical Factors for Global Protein Economics vitaplus dairy... · 12/10/2019 · • Nov CPI was...

12/13/2019

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Kerns and Associates.

Kerns and Associates

2617 Northridge Parkway

Ames, IA 50010

(515) 268-8888


Critical Factors for Global Protein Economics

Vita Plus Dairy Summit – 2019

Steve R. Meyer, Ph. D.


Disclaimer

• This publication is intended for informational purposes only and the opinions set forth herein should not be viewed as an offer or solicitation to buy, sell or otherwise trade futures, options or securities. All opinions and information contained in this document constitute Risk Assessment and Management, Inc.‘s judgment as of the date of this document and are subject to change without notice. Risk Assessment and Management, Inc. and their respective directors and employees may effect or have effected a transaction for their own account in the investments referred to in the material contained herein before or after the material is published to any customer of Risk Assessment and Management, Inc. or may give advice to customers which may differ from or be inconsistent with the information and opinions contained herein. While the information contained herein was obtained from sources believed to be reliable, Risk Assessment and Management, Inc. accepts no liability whatsoever for any loss arising from any inaccuracy herein or from any use of this document or its contents. This document may not be reproduced, distributed or published in electronic, paper or other form for any purpose without the prior written consent of Risk Assessment and Management, Inc. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. For the customers of Risk Assessment and Management, Inc. this report is produced exclusively for our business and expert clients, it is not for general distribution and our services are not available to private clients. Past performance is not indicative of future results.

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Factors affecting global protein prices and the outlook for the future

• Global supplies• Beef, chicken, fish and dairy are pretty straightforward

• Feed costs are a pleasant surprise

• Pork is the big wild card

• Trade relationships• Progress has been made – Japan FTA, USMCA

• Two major sticking points

• China-US

• WTO expiration

• World economy – outlook is generally positive but there are warning signs

• U.S.

• China is slowing – trade wars, mathematics

• How long will negative interest rates work in the EU?

• Can U.S. agricultural survive its own excellence?


Feed costs will remain reasonable –remarkable given 2019 weather!

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Joe Kerns: “If we didn’t kill this crop, can we ever kill a crop again?”


Using hog costs as an example: 2020 looks “normal” by recent standards

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USDA 2020: Beef +1%, Chicken +3.9%, Pork -10% -- and pork is optimistic!


Changes in global supply will be dominated by decline in pork

Source: Rabobank

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Fish: A small portion in western hemisphere, much larger in the east


And aquaculture is a major contributor in China

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The China Principle:

Any number times 1.4 billion =

A GREAT BIG NUMBER!


ASF a game changer No. 1: MAGNITUDE

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China pre ASF: 430 mil. pigs, 43 mil. sows, half of the world’s supply


ASF is a game changer #2: The Virus

• Encapsulated virus – many protective proteins make it very hard to kill

• Contagious but not aerosol – nose-nose, fecal-oral, survives in pork products

• Mortality rates > 95%

• There is no approved vaccine• Some modified live ones are being used in China

• ~ 50% effective but dangerous as they hide infections

• 75% of the world’s hogs are now threatened• (EU and Asia)

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ASF Timeline

• 1907: The first diagnosed case of ASF occurred in Kenya.

• 1950 – 1980s: The virus was detected in Europe, the Caribbean and Brazil. The disease was effectively eradicated from these regions at that time.

• 1971: An ASF case was found in Cuba. It has been found in the Dominican Republic and a few other Caribbean islands, but not in recent years.

• 2007: ASF reported in Georgia. It quickly spread across the Caucasus and the Russian Federation, Belarus and Ukraine.

• 2014: ASF reaches eastern nations of the EU.

• 2018: Aug 3, first case reported in China

• 2018: Sep 13, first case (wild boar) reported in Belgium

• 2019: Jan 15, first case reported in Mongolia

• 2019: Feb 19, first case reported in Vietnam

• 2019: Apr 2, first case reported in Cambodia

• 2019: May 23, first case reported in North Korea

• 2019: Jun 17, first case reported in Laos


Source: OIE

http://www.oie.int/wahis_2/public/wahid.php/Diseaseinformation/Diseaseoutbreakmaps


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Source: OIE



Which Disease is WORSE?

After 10 days:

100 hogs in a pen;

one hog infected

= dead

= infected/survived

FMD CSF ASF

Source: Institute of Epidemiology, Federal Research Institute for Animal Health, African Swine

Fever - A Habitat Epidemic Often With Low Contagiousness, Depner et. al

Note: real-world

infections are generally

worse (>1 hog infections)


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• NOT NEARLY all of the “lost” pigs were buried/burned!

• Many were slaughtered before ASF killed them• North – broke 8/3/18 and moved to market last fall

• South – Major areas broke in January or after – still slaughtering susceptible pigs – especially in Sechuan

• Cold storage capacity appears to be MUCH larger than believed – Brett: 10 mil. MT = 22 billion pounds

• Demand – a wild card since day one!• Anecdotal evidence of restaurants/stores removing pork

• Substitution of beef and chicken

Due to the “lava flow” nature of ASF . . .


A “theoretical” slaughter chart:

What is annual production loss?

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So where did the hogs go?

• Most were slaughtered, a very small percentage were burned/buried

• Zhengbang reported Jan-Apr sales +45% (Apr +78%, March +75%)

• Shuanghui (WH Group) reported slaughter up +21% in Q1

• HEAVY slaughter rates as ASF fears drove hogs to market – whether infected or not

• And remember: No impact on humans!

• The “lost hogs” were not lost…at least in the beginning


Frozen Pork Inventory?

• Chinese commodity/crop/meat ending stocks are a “State Secret”

• Traders and other market sources in China suggest that they could be 8-10 MILLION MT

• That is a staggering level, but is possible

• As processors saw slaughter rates surge through ASF they knew that price hikes were ahead

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China hog prices did not react for a whole year!


And neither did EU prices – but look where they have gone since July

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Kerns and Associates.Source: JCI

China hog prices reflect timing of policy, losses

• Recent declines: Price exhaustion or GOC policy directives? Both?


Beef and chicken prices indicate some demand shifting but note the scales . . .

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China’s Pork Production GAP

• 2018/2019 are the transition years• 2017 baseline: 40.9 mmt of production (shipped wt

equivalent)

• Production in 2020 falls -40% from 2017• Herd size -40% on Jan 1, 2020

• 2020 gap of 16.3 mmt (shipped wt)• Imports rise +1.7 mmt from 2017 (+140%)

• Demand avg -8%; 3.3 mmt from 2017

• 300 kmt/mo of frozen inventory released

• Gap is still 7.7 mmt…


Source: USDA/FAS 2017, AgriTrends forecasts

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Tariffs have been aproblem but U.S. pork exports will be record large in 2019. . .


And the main reason is CHINA/HK – plus a nice post-tariff rebound for Mexico

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Weekly data for China/HK – have improved to over 10k MT/week


FAS “catch-up” data dumps were not useful but weekly data is hopefully better now

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Trade Issues – Pretty much problems of our own making – but maybe necessary ones

• Successes • Japan FTA – Absolutely necessary to get us back

on an even playing field with EU and CPTPP

• USMCA -- maintains our zero tariff position for pork, beef and poultry with Mexico and Canada

• Some gains for dairy but they are small – Canadian dairymen have learned EU protectionism well

• Two major sticking points• China-US – Who knows what will happen now

• Probably not a good idea to weaken the president

• WTO appellate body “expiration” – getting very little attention


World economy – outlook is generally

positive but there are warning signs

U.S.

China is slowing – trade wars,

mathematics

How long will negative interest

rates work in the EU?

Can U.S. agricultural survive its own

excellence?

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GDP growth slowed in 2019 but IMF forecast is for a rebound in ‘20 and on


A few troubled spots and Asia remains strong – in spite of China slowing down

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U.S. macro conditions remain generally positive . . .

• World economic growth is still positive (IMF: +3.7% in 2019) – as are most major countries

• Q1 real GDP growth at 3.2% yr/yr, 3.2% qtr/qtr annualized

• RPDI per capita is growing – 2.3% yr/yr in ’18, 1.8% YTD

• U rate at 3.5% in Nov – pushing wages slightly higher

• 2018 inflation = 1.9%, down from 2.1% the past two years

• Nov CPI was +2.05% and 2.3% YTD

• Critical level is 2%

• Fed rate cuts were to offset trade war impact

• But they won’t let inflation get out of hand


Per cap meat & poultry availability/ disappearance . . .

. . . from 198.9 in ’14 to 219.6 in 2019 and 221.4 in 2020

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For the moment, though, meat demand is good

. . . Oct 3-species RPCE: +3.2% yr/yr, YTD is +1.4%


Some troubling signs about the U.S. economy

THIS RECOVERY: A GOODIE BUT OLDIE!

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Dr. Dieli’s EAS put Jan ‘19 as 1st eligible month . . . . . . EAS went below 200 in April 2018

www.nospinforecast.com


The yield curve. . Compression, a kink and continues toward an inversion

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Can American agriculture save itself? Consider milk yields


Corn yields

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Soybean yields


Swine efficiency

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And even beef efficiency


Can we save ourselves?

• Growing efficiency puts more and more supply on the market

• Population growth accounts for some

• Exports for others

• Matching the rates of growth are critical and it appears producers overlook efficiency gains when they consider output changes.

• Can’t collude

• Moral imperative to do as much as possible with the least amount possible

• NEED TO ALWAYS THINK!

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Kerns and Associates

2617 Northridge Parkway

Ames, IA 50010

(515) 268-8888


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Critical Factors for Global Protein Economics vitaplus dairy... · 12/10/2019 · • Nov CPI was...

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