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Large Hog Companies Gain from China’s Ongoing African Swine Fever

Chen-Ti Chen (ctc@iastate.edu), Tao Xiong (taoxiong@mail.hzau.edu.cn), and Wendong Zhang (wdzhang@iastate.edu)

It has been almost two years since China first reported an outbreak of African Swine Fever (ASF). As of June 5, 2020, China’s Ministry of Agriculture and Rural Affairs (MARA) had reported more than 177 ASF outbreaks, which resulted in an almost 32% reduction in hog and sow inventories since November 2018. These reductions—103 million pigs and 8.7 million sows—account for more than one-fifth of the world’s hog inventory (figure 1).

Figure 1
Figure 1. Changes in China’s hog inventory, pork imports, live pig price, and pork price and the number ASF outbreaks in China, 8/2018–2/2020.
Notes: In the top panel, the left axis shows monthly hog inventory and pork imports in percentage changes, using August 2018 as the baseline value of 100; and, the right axis shows monthly actual live hog and pork prices (CNY/kg). The number of ASF outbreaks is also aggregated to monthly level in the bottom figure.

As China largely gained control of COVID-19 and reopened its economy, several ASF outbreaks occurred, especially in pig transporting vehicles. Despite the gravity of these events, our recent research (Xiong et al. 2020) shows that ASF outbreaks may come as a blessing in disguise for large hog companies—they financially gain from ASF outbreaks due to the dramatic supply shortage of pork the outbreaks create.

The widespread ASF outbreaks and declines in hog inventories shown in figure 1 led to significant changes in China’s pork prices, pork supply, and its need for imports. China’s pork prices started rising in February 2019 and surged 154% over the next 11 months due to the severe shortage in supply. Before the ASF outbreaks, China was able to produce 97% of its pork consumption domestically, but the ASF-induced supply shortage quickly led to an urgent need to import pork from the global market. According to the General Administration of Customs, in comparison to August 2018, China’s pork imports surged almost 102% in May 2019 and 314% in March 2020, and they are slated to reach historic levels this year (Xi et al. 2020; Carriquiry et al. 2019).

With all the ASF-induced market fluctuations joining forces, it remains unclear what we can say about the welfare of hog firms, who were among the most impacted industries. Conventional wisdom suggests that food safety events, such as disease outbreaks or food recalls, should adversely impact the financial standings of contaminated firms. However, the evidence seems to suggest otherwise—since early 2019, stock prices for many Chinese hog companies saw a dramatic upsurge along with the rising pork prices and widening supply gaps.

To formally assess the financial impacts of ASF outbreaks on hog firms, we use a method called the event study approach, which allows us to isolate the response of stock prices attributed exclusively to ASF outbreaks. In particular, we use historical stock price data prior to any ASF outbreaks to estimate a counterfactual baseline scenario of what the stock returns for a company would have been had the ASF event never occurred. The deviation of the actual stock returns from the baseline ASF-free returns are referred to as the abnormal stock returns. Positive abnormal stock returns suggest the firm benefits financially from the event and negative returns suggest otherwise.

Figure 2 shows Chinese hog firms’ cumulative abnormal stock returns (CAR) for the first 15 days after each ASF outbreak during four subsequent stages from August 2018 to September 2019. We calculate CAR as the day-to-day accumulation of abnormal stock returns following each event. The sample includes the top-10 publicly listed Chinese hog firms. We observe mixed responses of stock prices when ASF first broke out in August 2018—some hog firms’ CARs were negative, but of modest magnitude, and some firms were either not impacted by the outbreaks or even saw positive CAR values. As time went on, the increasing CAR values for Chinese hog firms following each outbreak reflected the concerns over shortages of pork supply. The impact was the most significant from January to February 2019, which was during the Chinese New Year Festival and a peak demand season for pork. In particular, some Chinese companies, such as Tangrenshen Group, and Zhengbang Tech, saw positive CARs greater than 40% at some point during the Chinese New Year. These substantial positive returns highlight the dominance of pork for Chinese consumers’ diets.

Figure 2
Figure 2. Cumulative abnormal stock returns for China’s top-10 hog producing companies in four separate periods.
Notes: We accumulate CAR values over 15 trading following each event. The vertical axis displays the top-10 Chinese hog firms (in no particular order) and the horizontal axis is CAR values in percentage change. Each box, moving from the left edge to the middle line and to the right edge is the 25th percentile, median, and 75th percentile of the distribution. Whiskers extending from the box show the minimum and maximum CAR values. A yellow box indicates that the average value is statistically different from zero from the adjusted BMP t-test at the 5% significance level (the box is blank otherwise). Each + symbol in red indicates an outlier that is not included in the test sample.

Figure 3 shows CAR values for 15 publicly listed foreign hog firms from eight countries across four different stages. Similar to the Chinese hog firms, these foreign firms initially exhibited mixed, and mostly insignificant, CAR values at the beginning of the ASF outbreak. Similarly, some foreign firms also saw positive, though modest, CAR values when China’s pork industry suffered from more severe supply shortages at the beginning of 2019. This is especially true for companies from countries that have larger pork market shares in China, such as Brazil, Canada, Finland, Russia, and Thailand. It is worth noting that, in general, Brazilian companies benefited more than US companies from China’s ASF outbreaks, in part due to the US-China trade war. On the other hand, some foreign hog firms never financially benefited from the outbreaks in meaningful ways, such as Cranswick PLC and Nomad Foods, both from the United Kingdom.

Figure 3
Figure 3. Cumulative abnormal stock returns due to ASF outbreaks in China for 15 foreign hog firms in four separate periods.
Notes: We accumulate all CAR values over 15 trading days following each event. The vertical axis displays the 15 foreign hog firms (in no particular order) and the horizontal axis is CAR values in percentage change. Each box, moving from the left edge to the middle line and to the right edge is the 25th percentile, median, and 75th percentile of the distribution. Whiskers extending from the box connect the minimum and maximum CAR values. A yellow box indicates that the average value is statistically different from zero from the adjusted BMP t-test at the 5% significance level (the box is blank otherwise). Each + symbol in red indicates an outlier that is not included in the test sample.

The series of ASF outbreaks have since had profound and likely long-lasting effects on the hog industry in China and abroad. For foreign hog producers, the good news is pork import demand from China, even today, remains strong. For instance, US pork export to China last year has just reached record highs over the past 10 years, which will likely continue to grow given the phase one US-China trade deal (Xi et al. 2020).

For China’s hog industry, the dramatic reductions in inventory may in fact serve as a long-awaited opportunity for consolidation and modernization. The vast majority of the outbreaks were on farms with fewer than 300 hogs; and, in that regard, ASF wiped out almost half of China’s small-scale farms, which has paved a path toward more expansion for large farms. For example, Wens Foodstuff Group, the largest Chinese hog firm, acquired a large farm in central China, which increased its annual production capacity by an additional 28,000 sows and 700,000 pigs.

In addition, the outbreaks also seem to have boosted deeper integration along the pork supply chain. Top Chinese hog breeding companies have started extending their reach into the slaughtering and processing industries. One ongoing development in the industry is the transition from a live animal transportation system to chilled meat transportation and cold chain logistics, in light of the fact that 70% of the ASF outbreaks were related to live pig transportation.

The capital gains through the positive stock returns from the ASF outbreaks also have further incentivized large farms to invest in and upgrade facilities, such as transitioning to better emission and waste treatments and creating facilities with a higher degree of breeding automation. This process is likely accelerating given that a large amount of the less-efficient ‘backyard’ farms, which represented 40% of China’s hog inventories before the ASF outbreaks, have since exited the markets and been replaced by large-scale commercial farms.

The Chinese government is pushing out multiple policies to spur domestic hog production, which likely will further accelerate the consolidation and upgrading of the meat production supply chain.

Some highlights of the most critical policies include:

Additional farm-level testing. To address ASF contamination risk, China announced a plan to systematically test farms for ASF in 498 major hog-producing counties in order to establish a baseline for the prevalence of the virus. Each province will test every swine farm producing 2,000 head or more and a sample of farms producing 500–2,000 head (Dim Sums 2020).

Less land use restrictions. Land for hog facilities will be managed as agricultural land and will no longer go through the lengthy approval procedures required for construction land. Cropland can be used for hog facility construction as long as it is not permanent basic farmland, and the 15-mu (2 US acres) limit requirement for the auxiliary facilities of pig farms is removed (MNR 2019a). Furthermore, multi-story buildings are allowed to use as pig breeding and production facilities (MNR 2019b).

Less environmental regulation. More than 96% of hog breeding projects with an annual slaughter of less than 5,000 heads just need to complete an online environmental impact registration form without having to go through environmental impact assessment (EIA) approval. For larger projects, the government is moving toward approving construction without any formal EIA as of December 2021, but will monitor environmental impacts after construction (MEE 2019).

More financial incentives. China has expanded the temporary financing and loan discount program to cover hog facility construction and upgrades until December 2020. About 160,000 producers with hog farms that have at least a 500-head annual slaughter can now apply—the previous limit was 5,000 head. In addition, there are pilot projects to allow the use of pigs as collateral in addition to land rights, hog buildings, and machinery (SC 2020).

More risk management tools. China will increase the insurance coverage of live pigs; temporarily increase the insurance coverage of fertile sows and fattening pigs; increase the insurance coverage of fertile sows from ¥1,000–¥1,200 to ¥1,500 (Chinese yuan); and, increase the insurance coverage of fattening pigs from ¥500–¥600 to ¥800 (Chen and Xu 2019).

Live hog futures approved. On April 27, 2020, China’s securities regulator approved the launch of domestic hog futures, China’s first financial derivative based on a live animal, on the Dalian Commodity Exchange. Although it takes some time for the contracts to be listed and traded, China is set to become the world’s second market to trade live pig futures (CD 2020)—the United States is the only other country to do so.

References

Carriquiry, M., A. Elobeid, D. Hayes, and W. Zhang. 2019. “Impacts of African Swine Fever on US and World Commodity Markets.” Agricultural Policy Review fall 2019, Center for Agricultural and Rural Development, Iowa State University.

China Daily (CD). 2020. “China Securities Regulator Approves Launch of Hog Futures.” China Daily updated April 26, 2020.

Dim Sums. 2020. “Measures to Address ASF Risk to China’s Pigs.” Dim Sums May 24, 2020.

He, X., D. Hayes, and W. Zhang. 2020. “China’s Agricultural Imports under the Phase One Trade Deal: Is Success Possible in the COVID-19 Era?” CARD Working Paper 20-PB 29. Center for Agricultural and Rural Development, Iowa State University.

Chen, L., and L. Xu. 2019. “Encourage Pig Breeding: The Insured Amount of Capable Sows is increased from 1,000–1200 Yuan to 1500 Yuan, and the Insured Amount of Fattening Pigs is increased from 500-600 Yuan to 800 Yuan.” China Economic News September 18, 2019. (in Chinese)

Ministry of Ecology and Environment of China (MEE). 2019. “Notice on further improving the Current Work Related to the Management of Environmental Assessment of Live Pig Breeding.” Environmental Assessment Letter No. 872. (in Chinese)

Ministry of Natural Resources of China (MNR). 2019a. “Interpretation of the Notice of the General Office of the Ministry of Natural Resources on Issues Related to the Guarantee of Land for Pig Breeding.” (in Chinese)

Ministry of Natural Resources of China (MNR). 2019b. “Interpretation of the Notice of the Ministry of Natural Resources and the Ministry of Agriculture and Rural Affairs on Issues Concerning the Management of Facility Agricultural Land.” (in Chinese)

State Council of China (SC). 2020. “Three Departments Increase Financial Support for Hog Production and carry out Live Pig Mortgage Loan Pilot.” (in Chinese)

Xiong, T., W. Zhang, and C.-T. Chen. 2020. “A Fortune from Misfortune: Evidence from Hog Firms’ Stock Price Responses to China’s African Swine Fever.” CARD Working Paper 20-WP 602. Center for Agricultural and Rural Development, Iowa State University.