ASF Impact 'Unprecedented'
On a quarterly call with analysts, Noel White, Tyson's president and CEO, saw both opportunity and risk from African swine fever (ASF) but indicated the disease "has the potential to impact the global protein industry on a level that we have never experienced ..." White later said ASF has created "an unusual, perhaps unprecedented, time for the protein industry. In my 39 years, I've never seen an event that has the potential to change global protein production and consumption patterns as fast as African swine fever does. This situation is fluid and fast-moving, but we're working with others in the industry, government agencies and producers to prepare in the event ASF spreads to North America."
White stressed the risk remains that ASF could arrive in the United States because the disease has been around for more than a decade, but only spread rapidly during the past year, not just in China but Europe as well. White
said industry and the government have been more focused on ASF risks to the U.S. in the past few months.
THE THREAT IS REAL
"So, I think the threat is real," White said. "And I do think there is a distinct possibility it could come to the United States, and we need to be prepared for that. We need to be prepared from a regulatory standpoint."
Talking to analysts, White said ASF would "underscore the power of the Tyson business model." The company's diversity puts Tyson in a potential to capitalize as all proteins could benefit. "A worldwide decrease in pork supply would offer significant upside to our pork business, while also lifting the chicken and beef businesses as substitutes and increasing raw material costs in our prepared foods business."
White indicated Tyson would have to raise its prices of packaged foods because pork pricing hasn't kept pace with rising hog costs. Hog futures prices such as the May contract have rallied since February when the contract hit a low of $62.75. The May contract was at $83.37 on Monday, after dropping nearly $3 on Monday.
DRIVING UP PORK COSTS
African swine fever and increased slaughter capacity in the U.S. are driving up pork costs, "initially outpacing the value of pork," White said. ASF also drove some incremental demand for chicken in the past quarter, White said. Despite focusing heavily on ASF in comments to analysts, White said Tyson's performance forecasts currently don't include any potential effects from the disease, "as we do not have clarity on when the impact might occur or what the magnitude could be."
White cited the losses of pork in China, which could see as much as 30% of its herd decimated by African swine fever. So far, there is no cure for ASF, which affects hogs but does not affect humans or the food supply. As much as 10 million metric tons of pork product could be lost in China this year. White noted, "You don't have an incident like this where there's some place in the vicinity of 150 million and 200 million hogs that have died in China that there's not a significant impact."
White noted in response to an analyst question that Tyson already produces ractopamine-free pork that Tyson can export should China choose to buy more pork from the U.S.
EXPORT VOLUMES DOWN
So far, though, the U.S. can't count on big gains from pork exports to China. The U.S. Meat Export Federation runs a few months behind in its export data, but in its last information looking at February exports, pork volume was down 9% from 2018 totals and value was down 17%, at $455.9 million -- the lowest February totals since 2016. The USMEF cited that China and Hong Kong may be looking to import more pork, but the tariffs, at 62% right now, make it difficult for the U.S. industry to take advantage. For the first two months of the year, the value of exports to China and Hong Kong were down 34% from 2018.
White did not address U.S.-China trade relations in his comments to analysts, but expectations could change dramatically for exports if China were to drop its tariffs this year.
CHINA IMPORTS FORECAST
USDA's Foreign Agricultural Service recently forecast China pork imports at a record high this year due to African swine fever. USDA expects the European Union, Canada, Brazil and the U.S. all to boost exports to China throughout the rest of the year. USDA last month forecast U.S. pork exports to rise 5% over the rest of 2019. Still, Brazil could see as much as a 23% increase in pork exports and Europe could see an 11% increase.
"We could be end of the line for pork purchases, much like we are for soybeans now," said DTN Lead Analyst Todd Hultman.
While pork exports could rise in the second half of the year, one of Tyson's rivals, China-based WH Group, owner of Smithfield Foods, reported last week that its operating profit was down 10% for the first quarter of 2019 compared to a year ago. Despite increasing volume in hog production by 6.7%, WH Group's big loss was in the hog production area where the Chinese-based company recorded losses in China, the U.S. and Europe. Combined, the losses in its hog-production segment was $168 million, of which $157 million was from its U.S. operations.
WH Group cited a decline in hog prices in China due to oversupply. Slaughter in China rose nearly 21% in the first quarter of the year and pork prices in China were actually down nearly 3% from the first quarter of 2018. "Having said that, the spread of African swine fever in China has started to reduce its pork production and sow inventories," WH Group stated. "Hog prices of key markets in the globe moved up notably approaching the end of the period (quarter)."
USDA doesn't put as much stock in rising poultry exports to make up for expected pork declines. China is challenged by limits the country placed on imported poultry due to highly-pathogenic avian influenza. USDA last month forecast total U.S. chicken exports to rise just 1% while Brazil and the EU would see 2% export growth.
White also noted the limits of China ramping up its poultry production and the limits of Tyson gearing up its production to export more poultry to China. White pointed out the two countries largely produce different kinds of birds.
"So, it's a different type of product than what we're accustomed to," White said. "So, it's not as though you can turn off pork and turn on poultry. It will be multiple years before the supply balance comes back into equilibrium."