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African swine fever: What F&B companies need to know
African Swine Flu (ASF) is a highly contagious disease affecting pigs and wild boars, with an almost 100% fatality rate. No treatment or vaccine for the disease have yet been developed, and the only preventative measure is to kill the infected animals.
The first occurrence of ASF can be traced back to the early 1900s in Africa, which later spread to Europe in the 1950s. After remaining dormant for the past few decades, China reported its first case in August 2018 in the city of Shenyang, and since then, the virus has spread to other Asian and European countries such as Vietnam, Mongolia, Laos, Myanmar, North Korea, South Korea, Cambodia, Philippines, Russia, Poland, Bulgaria and Romania.
China feeling the heat of ASF outbreak
China is the world’s largest pork producer and consumer. It is home to half of the world’s pig population with a stock of 375 million pigs as of March 2019, according to National Bureau of Statistics of China.
Data from The Food and Agriculture Organization of the United Nations (FAO) indicates that Chinese authorities have culled over 1 million pigs as of October 2019, to contain the virus. However, experts suggest that up to half of China’s swine population could still be at risk, which could have a devastating impact on the global pork industry.
“In 2019, we expect Chinese pork production losses of 25–35% in response to ASF. Reports of extreme losses (over 50%) are limited to confined areas.” – Christine MacCracken, Senior Analyst – Animal Protein, Rabobank (April 2019)
With domestic production disrupted, its ongoing trade war with the US and a Chinese ban on Canadian pork, China is dependent on European exporters to meet its pork consumption needs. As a result, the European Union is emerging as the biggest winner from the current situation.
Further, an acute supply shortage resulting from the culling is putting upward pressure on pork prices – with prices in China rising by 46.7% Y-o-Y in August 2019, pushing food inflation to 10% in August 2019 (up from 9.1% in July 2019). Pork is a staple meat in China and with prices rising, the Chinese economy, which is a net pork importer, is expected to feel the adverse impact.
Other markets feeling the heat
The feeds (oilseeds and grains) market is also witnessing unprecedented fluctuations.
China’s imports of soybean (a major pig feed component) fell 7.9% Y-o-Y for the first nine months of 2019 due to reduced demand and the ongoing trade war with the US.
Demand for corn as animal feed has also decreased and is expected to decline further.
“ASF will have a huge influence on feed prices and trade flows of meat and soybeans over the coming months.” – Gregory Heckman, CEO, Bunge (May 2019)
On the other hand, the poultry industry may be positively impacted.
The fall in pork supply and simultaneous price rise will alter consumer preferences in the near future and result in increased demand for poultry, ultimately increasing its prices. Increased investment in the poultry industry is likely to follow.
Governments taking counter measures
Chinese authorities are deploying every solution in their arsenal, ranging from subsidies to sanctions, to curtail the issue.
In September the government announced subsidies of up to 5 million yuan ($700,000) for the construction of large-scale pig farms, effective waste treatment and relocation of large farms for environmental reasons. Restrictions on the movement of live pigs, considered to be one of the major causes of ASF, have also been imposed.
At the same time, restrictions on hog production have been removed in some of the provinces to tackle drastically reduced hog populations. Pig breeding using artificial insemination technology is also being considered. Imports of elite pig semen from European countries are likely to increase since it appears to be a better option than importing live animals. However, the semen imports will be of little help while there is a shortage of breeding sows (female pigs) in the country.
“Intervention by China’s government to halt the spread of ASF and mitigate its impact on pork prices is proving ineffective. Inflation will next year rise above the government’s target for the first time in nearly a decade as a result.” – Julian Evans-Pritchard, Senior China Economist, Capital Economics (September 2019)
European countries are also ramping up efforts to keep ASF out of the region. The UK’s Department for Environment, Food and Rural Affairs has directed border security officers to seize and destroy all illegally imported meat. While Denmark is constructing a fence at its border to keep wild hogs out of the country, Belgium is suggesting shooting of wild hogs to be the only effective solution.
Despite the far-ranging solutions implemented by the Chinese government and similar initiatives being undertaken by other Asian countries, ASF is unlikely to be under control anytime soon.
Mixed response from F&B companies
While the overall F&B sector is still uncertain about the long-term impact of ASF, companies are implementing a diverse range of responses to tackle the situation. Here are a few prominent examples:
- Fast-food chain Burger King is experimenting with plant-based protein as a substitute for meat and rolled out its own meatless “Whopper” in August 2019. McDonald’s has also started to experiment with meatless substitutes to match its competition. This will not only help reduce the impact of ASF but also support them in capturing a new customer base.
- Carrols Restaurant Group, the largest Burger King franchisee, is contemplating a price increase at its Burger King and Popeyes Louisiana Kitchen restaurants to cover higher meat prices.
- Yum China, which runs the KFC and Pizza Hut chains, has responded to the hike in pork and poultry prices caused by the ASF outbreak and the US/China trade war, by using unpopular cuts of chicken (between the wing and the breast).
- Several fast-food chains such as Burger King, Wendy’s, Carl’s Jr. and McDonald’s are going strong with diverse breakfast options and have introduced more bacon items into their US menus, driven by consumer preference – betting on the fact that the hike in commodity prices can be outweighed by sales growth.
Conversely, some companies are relying on their existing business models to combat the impact of ASF. For example, Chipotle said in May 2019: “Chipotle purchases ‘higher-quality, more expensive pork than the commodity pork’ involved in the outbreak, and has pricing agreements in place that should mean any resulting increases won’t result in a significant negative impact to those costs.”
The other dynamic here is that some meat companies are likely to gain from this situation. For example, Pilgrim’s Pride, the second-largest US poultry processor, has seen demand from grocers to lock-in chicken supplies, in anticipation of continued increases in pork prices.
Even with the various remedial measures taken to tackle ASF situation, the profits of F&B companies are expected to slow down in the future. With the uncertainty enveloping the market, F&B companies must use a range of measures to protect top line and bottom line growth.
The Smart Cube can help procurement teams stay up to date with the latest market trends and developments, seek alternative sourcing destinations, and manage exposure to commodity price risk. Read more about how our customised Procurement and Supply Chain solutions can enable more informed and effective decision-making.
In her eleven years with The Smart Cube, Rashi has risen through the ranks from a research analyst to Senior Manager. Leading a team of 30 people, she is responsible for the end-to-end delivery of projects for clients in the CPG sector. An economics graduate, Rashi is an in-house expert in the F&B and FMCG space, especially on the procurement, supply chain and strategy side. When Rashi is not providing market intelligence to clients, she loves to spend her time doing kathak, a form of Indian classical dance.