Ledman joined other Rabobank analysts to explore the impact in a new RaboResearch paper, “African Swine Fever Losses to Complicate the Global Dairy Complex.”
China is home to the world’s largest swine population, accounting for 50 percent of global pork production. However, the current ASF epidemic could reduce China’s swine population by as many as 150 million head or more, cutting pork production by 25 to 35 percent.
Fewer hogs translates into lower demand for swine feed, with negative implications for key dairy ingredients important to piglet nutrition: milk permeate, whey permeate, whey powder and lactose, all used in swine feed.
Prior to the ASF outbreak, China’s pork producers fed an estimated 250,000 metric tons of lactose (about 0.8 pounds per post-weaned piglet) annually. Lactose is a component of dry whey, whey permeate and milk permeate.
China annually imported about 530,000 metric tons of whey and permeate and 84,000 metric tons of lactose for feed and food purposes between 2016-18, Ledman said. Rabobank analysts estimate between 50 to 60 percent of those imports were used in animal feed. With a much smaller swine herd in 2019, China’s demand for feed-grade whey, permeate and lactose could shrink by 54,500 to 72,500 metric tons.
The first signs of declining whey and permeate imports became evident in November 2018, and March 2019 imports declined about 27 percent compared to March 2018. Imports from the U.S. were hit particularly hard, falling about 60 percent compared to the same month a year before.
Double whammy: Tariffs
Before China imposed additional retaliatory tariffs on U.S. imports in July 2018 as a result of the ongoing trade war, the U.S. supplied more than 55 percent of China’s whey and permeate imports and 75 percent of imported lactose. After the tariff increases, U.S. exports dropped.
Despite the decline, the U.S. remained a key supplier of those products to China for the remainder of 2018. “This will not be the case in 2019,” Ledman warned.
In a declining Chinese market, higher tariffs on U.S. products mean suppliers from the EU are gaining market share – at the expense of U.S. suppliers.
“Without a resolution in the ongoing trade war, the U.S. is expected to continue to lose market share in the declining Chinese market for dairy-derived animal feeds unless significant price concessions are made,” Ledman said.
The full impact of lower exports, putting downward pressure on global and U.S. whey prices, reaches all the way back to U.S. dairy farms. A 1-cent-per-pound change in the U.S. dry whey price results in a 6-cent-per-hundredweight move in the Class III milk price.
International whey powder prices have declined 15 to 20 percent since January, and lactose prices have retreated by nearly 10 percent. Whey permeate prices have felt the brunt of the decline, with prices dropping 50 percent since February. Weakening U.S. spot and futures prices for dry whey and lactose mean the market may not yet have fully absorbed the gravity of the situation, Ledman said.
China’s rebuilding of the swine herd is likely to take years, according to Rabobank’s researchers. Thus, the demand for dry whey, permeate and lactose could be negatively impacted for some time.
“Further downward pricing pressure is anticipated as a result of significantly weakened demand from the Chinese swine sector, forcing manufacturers to find new outlets for their products in food-grade applications, other animal feed sectors and new export destinations,” Ledman said.
Rising demand for alternative protein sources, especially beef, could constrain China’s milk production if dairy cow culling accelerates to fill some of that protein demand gap. Chinese consumers’ preference for beef is growing, but the country faces a chronic supply shortage, Ledman said.
While lower milk production would normally be a positive for long-term global milk prices by boosting the potential for increased non-animal-feed dairy product imports, the downward pressure on whey product prices is expected to have a more immediate impact on farm-level milk prices in key exporting countries, including the U.S.
Editor’s note: The USDA’s March 2019 export estimates were scheduled to be released on May 9-10. Check Progressive Dairyman’s website for updates. A summary of dairy product, dairy cattle and hay exports will be included in next week’s PD Extra enewsletter.
PHOTO: Mary Ledman is a global dairy strategist with Rabobank. Photo courtesy of Rabobank.
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