Our Interconnected World!

by Peter Thor, President, Bellissimo Foods

Year’s ago, when teaching an MBA class on International Marketing, the “interconnected world” was a growing concept based on information technology and rapidly improving freight options. Today, we find specialization in production and industry concentration having incredible effects, both good and bad, on our world food supply. Grain, poultry, pork, and beef market supply and demand are all interconnected.

While Americans enjoy the lowest cost per capita for food as a percent of income, around 12%, we have an outsized impact on food costs around the world due to our robust exports. Consider China to which the US exported some $20 billion in food annually, primarily grain and meat, before the new tariffs were imposed. Since then, US exports of food and raw materials are down 47% from June 2018 which is the last month before tariffs kicked in. The incremental domestic supply has benefited US citizens with temporarily lower local food costs for protein and dairy. Now that’s about to change…

Ironically, 2019 is the “Year of the Pig”. One could not have guessed the magnitude of a worldwide shortage of pork, nor its likely impact on beef, poultry, and grain costs. The Chinese are by far the world’s leading consumers of pork, also the leading producer of nearly 50% of the world’s hogs. The African Swine Fever has spread beyond China. It has hit other Asian countries and parts of Europe. Experts are concerned it will spread to the US. There is no cure or vaccine for pigs, but experts assure us that it is not contagious to humans.

Why is this important? China is estimating that their losses will be 136 million hogs in 2019 compared to total US supply in 2018 of 124 million hogs. It is expected to take until at least 2021 to rebuild the hog supply in China which will have lasting effects on pork prices,beef and poultry demand and prices, and grain, particularly soybeans which have been largely exported to China to feed hogs.

The USDA, in a report published this week, forecast that China will increase pork imports from the U.S. and other countries by 41 percent
from 2018 to a record high because of African swine fever. That is the start. Pork prices in the US are already being impacted. Wholesale prices for pork 72’s, a primary ingredient in pepperoni and sausage have doubled since the first of the year, and beef 50’s, another key ingredient has increased 40%. Much of the increase is recent since the magnitude of the supply issues have become known. Price increases announced for pepperoni, as a result, have jumped by 25 – 45 cents per pound depending on the packer.

Moving forward, consider other likely implications:

  1.  Domestic prices of everything pork will increase as pork is exported to fill supply shortage in Asia.
  2.  Grain prices will be lower short term due to lower demand and higher tariffs. Long term lower export demand for grain as other countries adapt and supply.
  3. Beef prices increase and domes􀀁c demand increases in response to higher pork prices.
  4. Poultry production increases as it is the industry that can most rapidly expand production. Limitations in processing capacity are expected as are modest increases in prices.

he above assumes that the Swine Flu does not enter the US. To keep it out, the US has banned pork products from affected countries. But if it does, the US pork industry will be impacted though probably not as much due to the modern and concentrated infrastructure. However, consumers will react by eating less pork despite assurances that it is not contagious. Examples of this occur with every product recall and especially with matters like this; remember “Alar” in apples, “mad cow” disease in cattle, and “avian flu” in poultry. All are small compared to the magnitude of African Swine Flu.

Grain production, which is consumed directly, made into oils, and used for feed for all our meat is also uncertain. As recently as last week the grain market prices were advancing due to supply concerns of Midwest storms and flooding. Exports have been lower year to date, especially for soybeans, due to the African Swine Flu described above as well as imposed tariff penal􀀁es. Grain shipments to date in 2019 are down 7% compared to a year ago, and the outlook for both supply and costs are uncertain. Recent trade comments have reignited demand fears, sending grain prices lower. We hope that the situation will have stabilized by the 􀀁me you read this ar􀀁cle. We also hope for everyone concerned that a vaccine or other treatment for the African Swine Fever is found to protect our fragile food supply, for it is clear that more than ever we live in an interconnected world!

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