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African swine flu impact spreads over Chinese economy, global commodity prices

May. 15 2019 — Bacon could soon be off the fried breakfast menu. African swine flu is sweeping across South East Asia and threatening to spread even further after decimating some pig farmers in China, which consumes more pork than any other country. The virulent disease is now creating a domino effect for commodities markets, farmers and consumers.

HSBC’s closely watched aggregated commodity price index of 20 key resources gained 2% last month, with the cost of pork showing the biggest increase. Pork prices tracked by the bank’s commodities research unit gained by almost 40%. The cause of this unwelcome inflation is China’s pig crisis.

“African swine fever has had a significant impact on the global pork market recently,” warned Paul Bloxham, chief economist for Australia and New Zealand at HSBC in his latest research. “This is having knock-on effects around the world.”

The Chinese literally can’t get enough pork in normal circumstances. The world’s second-largest economy accounts for half of all global consumption, which amplifies the wider impact of the crisis now hitting its farms. Since the first outbreaks were recorded last August, over 1 million pigs have been culled and 129 outbreaks officially reported by authorities, according to the UN’s Food and Agriculture Organization.

To control its rapid spread, China has been forced to implement a near scorched-earth policy because the disease has a 100% fatality rate and is difficult to eradicate. Aside from culling pigs, Beijing has created epidemic zones and banned the transportation of the animals between provinces, in addition to shutting pig markets.

For British farmers, these stringent measures will bring back painful memories of the foot-and-mouth outbreak in 2001, which eventually saw 6 million cows and sheep killed. The government last September raised its risk assessment for swine flu spreading to Britain from low to medium after cases were spotted in wild boar in Belgium and Eastern Europe.

“This was because, despite the relatively low level of legal trade in live pigs or commercially produced pig products, there could be a risk from the fomite pathway involving movement of people and vehicles from affected Eastern EU countries and the evidence around the findings of contaminated/infected non-EU origin pig products detected in the EU,” said the UK’s Animal and Plant Health Agency.

Pressure on commodity prices

In China the outbreak has already hit the wider economy. Consumer price inflation, which had been under control before the disease spread, climbed over 5% last month. This comes at a tricky time for China’s government, which is trying to navigate an awkward trade war with the US and reinvigorate the high pace of economic growth that has defined the country for the last 20 years.

Soybean prices have been hit hardest. The cheap source of protein is the favored feed for fattening pigs and a bellwether for the global agriculture sector. The S&P Global Platts SOYBEX CFR China, which measures the price of the commodity, has dropped 20% to just over $357/mt since the first outbreaks of swine flu were recorded last year. The slump is a record low for the assessment.

Infographic showing commodity price impacts of Asian swine flu

Click for full-size infographic

Although showing signs of stabilizing in China, the problem is fanning out across Asia. Vietnam’s first case was reported in February and almost 90,000 pigs have been culled. Neighboring Cambodia spotted its first cases in March. Meanwhile, Japan picked up traces of the pestilence in sausages brought in as souvenirs by two passengers travelling on planes from Shanghai and Qingdao.

“In the end it’s the sheer size of the population that makes China so influential. Given that it doesn’t look like these outbreaks of swine flu are going to be stopped, or controlled in a great hurry, domestic supply is going to continue to decline in 2019,” said Sebastian Lewis, China content director at S&P Global Platts.

Meanwhile, pig farmers outside Asia are benefiting from cheaper feed costs and higher export demand. UK pork exports to China have increased by 28%, compared with the same period last year, and pig prices in the EU increased by an average of 19% in the four weeks ending April 21, according to UK’s Agriculture and Horticulture Development Board.

In the US, producers have enjoyed an 80% surge in pork prices since the end of February partly on the expectation of higher demand for the meat, according to HSBC. China is normally America’s third-largest market for pork exports after Mexico and Japan. However, American soybean producers are less fortunate, as falling Chinese demand has depressed prices.

African swine flu’s spread is another example of how all commodities markets are interconnected in a global economy.