China Equities Blog

Evaluating the Effects of China’s Pork Crisis

20 May 2019

4 min read

John Lin| Chief Investment Officer—China Equities

Stuart Rae| Chief Investment Officer—Emerging Markets Value Equities

African swine fever is ravaging China’s pork supply and having a global impact on protein prices. For equity investors, the crisis serves as a reminder that even amid trade-war uncertainty, research into domestic trends can help investors access the country’s vast stock market.

China is a pork-loving nation that produces and consumes about half the world’s pig meat. That’s why the outbreak of African swine fever is so dramatic. It’s a deadly virus with no known vaccine or treatment, so Chinese farmers have been forced to conduct massive culls of hog herds. By the end of the year, China’s pork output may be reduced by as much as 30%, according to some analysts. At a time when Beyond Meat’s IPO in the US is drawing attention to potential substitutes for animal proteins, China’s crisis is threatening to change the supply and demand dynamics of meat markets around the world.

Shrinking Pork Supply Shakes Global Meat Markets

Consider the numbers. In 2018, China produced 54.2 million tons of pork while consuming 55.7 million tons. The total world supply of pork was 113 million tons. If current forecasts materialize, China would lose about 16 million tons of supply by year-end—more than the total production of the US and Brazil combined. The world simply doesn’t have enough pork to fill the void.

What about other animal proteins? Last year, China produced 11.7 million tons of chicken and 7.3 million tons of beef, according to the USDA. Substituting other meats for pork would push up demand in China and globally. This will have several effects on global markets:

Animal meat prices will increase—pork prices already rose 15%–20% in April, which is typically a seasonally weak period. Chinese pork prices may surge 50% by year-end, according to some forecasts. Chicken prices are rising and even the demand for premium Australian steaks has increased. There are already signs that meat prices are up, from the US to Europe to Brazil. Poorer countries will be affected most.

Meat consumption will decline—as prices rise broadly, we expect a significant decline in meat consumption in China over the next year and a half. This could potentially lead to a change in consumer behavior and tastes for years to come.

Grain prices are likely to fall—because there will be fewer hogs to feed. That’s bad news for farmers, especially those in the US who already feel squeezed by the US-China trade war.

Chinese inflation may rise—hog prices are a significant component of China’s consumer price index. Rising hog prices are already driving up the CPI and could create inflationary pressures that might constrain the People’s Bank of China’s ability to ease liquidity and support the economy.

What Does This Mean for Investors?

These trends offer some researchable points for investors. For example, the gap between input costs (corn) and rising output prices (hogs) is creating a more profitable dynamic for hog farmers not just in China, but in the US and beyond.

Swine Flu Crisis Widens Gap Between Input Costs and Output Prices

Through May 16, 2019
Past performance and current analyses do not guarantee future results.
Units for hog futures are USD per hundredweight. Units for corn futures are USD per bushel.
Source: Bloomberg

This analysis also highlights a key difference between trade-war uncertainty and the pork predicament in China. It’s very hard for investors to research the potential effects of a trade war because the outcome is tied to unpredictable political decisions. In contrast, it’s already possible to develop meaningful forecasts of how the swine flu will affect agricultural commodity markets, meat prices, industries and individual companies.

China’s Vast Stock Market Offers Plenty of Choice

For investors in China, the crisis also serves as a reminder about the power of the domestic economy and the depth of the local stock market. Even with the trade war raging, 1.3 billion Chinese people still need to put food on their tables. And China’s A-shares market is so vast, with more than 3,000 companies to choose from, that investors can find stocks of companies poised to benefit from shifting consumer habits and price trends, which are unrelated to trade tensions.

By understanding what’s happening on the ground in China, investors can position accordingly. Pork producers in China, Brazil and Europe could stand to benefit from rising prices and margins; shares of chicken farming companies might also see increased demand. At the same time, companies that sell animal feed and grain could face pressure, and their shares may be vulnerable today.

Fallout from the African swine flu reinforces the weight of China’s influence in global markets. In the past, the world would watch US trends to determine asset prices. Today, what happens in China matters just as much, as the world’s second-largest economy shakes up global markets for industrial commodities and soft agricultural commodities alike. Even if the fever is brought under control, it will take at least 12–18 months for China to get its hog herd back to its previous size. Such a major market event requires investors to take a closer look at companies around the world that may be affected—positively and negatively—by the unfolding crisis.

When looking to invest in China, trade wars shouldn’t be the only consideration. The pork crisis reinforces the importance of using focused bottom-up research across a range of industries and sectors to find attractive investments in China’s volatile and developing stock market.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Authors

John Lin

John Lin is the Chief Investment Officer of China Equities. He has been a Portfolio Manager for AB China Equities since 2013 and for Emerging Markets Value Equities since 2021. From 2008 to 2022, Lin served as a senior research analyst, responsible for covering financials, real estate and conglomerate companies in Hong Kong and China. He joined the firm in New York in 2006 as a research associate, covering consumer services companies for US Small & Mid-Cap Value Equities. Previously, Lin was a technology, media and telecom investment banker at Citigroup. He holds a BS (magna cum laude) in environmental engineering from Cornell University, and an MBA from the Wharton School at the University of Pennsylvania, where he earned the distinction Graduation with Honors. Location: Singapore

Stuart Rae

Stuart Rae is Chief Investment Officer of Emerging Markets Value Equities since 2023 and Chief Investment Officer of Asia-Pacific Value Equities, a position he has held since 2006. He is also a long-standing Portfolio Manager for China Equities. Previously, Rae was CIO of Australian Value Equities from 2003 to 2006. He joined the firm in 1999 as a research analyst covering the consumer sector, initially working in New York and London before moving to Sydney in 2003, Hong Kong in 2006 and Melbourne in 2021. Before that, Rae was a management consultant with McKinsey for six years in Australia and the UK. He holds a BSc (Hons) in physics from Monash University, Australia, and a DPhil in physics from the University of Oxford, where he studied as a Rhodes Scholar. Location: Melbourne

Evaluating the Effects of China’s Pork Crisis

Shrinking Pork Supply Shakes Global Meat Markets

What Does This Mean for Investors?

China’s Vast Stock Market Offers Plenty of Choice

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