Meat sales during the quarter—the peak season due to Lunar New Year holidays—were also sluggish as China struggles to mount a strong and sustainable post-COVID economic bounce, undermining consumer confidence.

Pork output fell 0.4 per cent from a year ago to 15.83 million tonnes, the first quarterly drop since the second quarter of 2020, data from the National Bureau of Statistics (NBS) showed on Tuesday.

Some 194.6 million hogs were slaughtered, a fall of 2.2 per cent.

Chinese hog farming companies in China had, from late last year until February, ramped up slaughter amid an outbreak of African swine fever and due to excessive supply in the market that prompted prices of pigs to plummet.

China, which consumes about half of the world’s pork, has encouraged the companies, which have aggressively expanded in recent years, to reduce hog numbers.

It has also lowered this year’s national target for normal retention of breeding sows to 39 million from 41 million.

The supply of hogs in China is, however, still expected to exceed demand due to high numbers of productive sows and a reluctance by companies to destock after making large investments.

Cash prices in the world’s biggest pork-producing nation were at about 15.2 yuan (C$2.90) per kilogramme on Monday, according to data from consultancy MySteel.

That’s up from 13.5 yuan in late February – a level well below the average production cost of 16 yuan per kg.

China’s pig herd size at the end of March was down 5.2 per cent from the previous year to 408.5 million heads, the NBS data showed. The sow herd at the end of February was down 6.9 per cent at 40.42 million, separate data from China’s agriculture ministry shows.

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Pork producers have been losing money as pig prices and consumer demand have struggled at a time of high costs for labor and other expenses.

Smithfield, owned by Hong Kong’s WH Group 0288.HK, said it will terminate employees who support its dealings with farms that raise hogs under production contracts. Layoffs may total about 70 employees, or up to one third of the 210 workers in Smithfield’s Utah hog production operations.

The contracts are with finishing farms that raise hogs to slaughter weight, Smithfield said in an email to Reuters on Wednesday, adding that it will continue to operate company-owned sow farms in Utah.

Analysts said pork producers need to cut the number of sows, or female pigs used to reproduce, to return to profitability more quickly.

“Our industry and company are experiencing historically challenging hog production market conditions,” Smithfield CEO Shane Smith said in a Tuesday statement.

Smithfield in October said it would shut a pork plant in Charlotte, North Carolina, after previously confirming it would permanently close 35 Missouri hog farm sites. Last year, the company said it would close a California plant and reduce its herd in the Western U.S.

Smithfield needs such cutbacks to remain competitive, Smith said. The company cited an “industry oversupply of pork, weaker consumer demand and high feed prices” as challenges, though futures prices for corn Cv1 used for livestock feed last month fell to their lowest level in nearly three years.

U.S. meat companies also grappled with excess chicken supplies this year, and face dwindling cattle inventories and a law requiring more space for livestock in California.

Tyson Foods TSN.N, the biggest U.S. meat company by sales, has shut chicken plants.

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The American price is used as the benchmark for Canadian prices because enough hogs are sold outside of contracts for packers to bid on, which results in more price transparency than is available in Canada.

The end result of studying how to decouple the Canadian price from American is still ongoing but other steps have been taken.

“We did develop the Made-in-Canada Hog Price Indicator,” says Gary Stordy, director of government and corporate affairs with the Canadian Pork Council.

It provides farmers the appropriate information and tools to negotiate pricing when managing contracts. It also provides producers with more information that they can use to understand how the current pricing works.

“As they talk with their processors, or who they sell their animals to, they are more informed and they can negotiate a stronger price.”

Work continues to explore the feasibility of establishing a price that reflects the value of Canadian pork.

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That’s prompted the Canadian Pork Council to come up with a hybrid proposal to fix income supports under AgriStability in a desperate bid to help the sector navigate the market chaos created by COVID-19.

While most of the industry’s attention has focused on adjusting the level at which payments are triggered to increase a producer’s eligibility for payments, pork producers are proposing to leave the trigger mechanism intact. Instead, they want the program to pay more compensation to the producers that become eligible under the existing criteria.

Why it matters: Many pork producers are experiencing significant declines in revenue this year, yet the sector has had difficulty convincing the federal government to modify AgriStability because of the potential cost to taxpayers.

Reduced processing capacity caused when plants were forced to temporarily close has combined with lower North American prices to push the promise of profitability in 2020 beyond the reach of most producers. In fact, industry data suggests most producers are losing $20 for every hog they market.

Patrick O’Neill, business development manager with Ontario Pork, says Ontario pork farmers could lose up to $200 million this year due to COVID-19.

Most agriculture commodities have floated through the COVID-19 crisis without significant market impact, as those commodities have been more influenced by other global factors, such as supply and trade disruptions.

Corn prices were up in late August as a derecho weather event, combined with drought cut yields in many cornfields across the U.S. Midwest.

It was expected that hog prices would move into profitability in summer 2020, but instead of hitting $180 to $190 per 100 kilograms as expected, current prices are around $130 per 100 kilograms, which is well below what producers need to make ends meet, according to Ontario Pork.

The formulas for AgriStability, which is cost-shared by federal and provincial governments, were modified in 2012 to make it harder for a producer to become eligible for payments.

Instead of experiencing a 15 per cent decline in their reference margins to qualify, they now need to see a 30 per cent decline.

As well, the payment formula, which was previously calculated on a tiered basis depending on the level of loss, was set at a flat 70 per cent.

The pork council proposal would leave the trigger mechanism at 70 per cent (based on a 30 per cent decline in their reference margin) but it would increase the level of compensation to 85 per cent.

“Doing so would retain AgriStability as a disaster program, respect Canada’s trade obligations, significantly reduce the cost to governments, but still provide additional support to those who are facing extreme loss,” said pork council chair Rick Bergmann in a letter to the federal and territorial ministers.

“Increasing the compensation rate to 85 per cent will make a significant difference erfor those producers who need it most,” he said. “It will increase payments by 20 per cent, but ensure those payments are only received by those facing substantial loss.”

John DeBruyn, Ontario producer and vice-chair of the board of directors of Ontario Pork says not being able to ship pigs affected many producers, and some were hit harder than others.

“Shipping your hogs is kind of the start of a process that for most farmers happens every week. You move your pigs out; you move everybody else along through the system. When that step can’t happen for you and you are not sure for how long (it is a challenge). It was a worry for those that weren’t (immediately) impacted, ‘you could be next,’ and I think that still hangs over us a bit,” says DeBruyn.

Ontario is currently up to date with hog shipping, but DeBruyn says that farmers are only one plant closure away from another round of delayed marketings. Plant closures in Quebec, especially, where Ontario pork producers send a good proportion of pigs, were significant.

The United States, which helps set the price for Ontario hogs, also was hit by plant closures, dropping the price for hogs across North America.

Producers are expecting a long-term market impact from COVID-19.

“We had the early on production issues, processing capacities mercifully come back online. So animals are flowing through the supply chain but we still have a lingering economic impact,” O’Neill said.

Decreased restaurant demand and a rise in unemployment have both had an impact. “Producers that are priced off the formula price for hogs at 100 per cent are losing significant amounts of money,” says DeBruyn.

Increasing the compensation offered under Agristability to 85 per cent from the current 70 per cent would significantly help producers overcome COVID-19.

“We think that would make the program more significantly responsive to the losses that farmers are facing,” says O’Neill.

“It would be easier for farmers to (deal) with a loss. Especially if they have a diversified operation where maybe hogs have been radically impacted by COVID, but maybe other farm businesses that have only been partially affected,” says O’Neill.

The average base price for pork producers in July of 2020 was $117 per 100 kilograms, a $60 per hog decrease from the price in July 2019 and a $63 decrease from the January future-based price forecast.

“The hurt is extreme in the pork industry. I think COVID has been a negative impact to all of agriculture. If the government wants to do (something) quickly they often like to do that using existing programs — AgriStability is an existing program based on individual farmer’s needs,” says O’Neill.

COVID-19 continues to create risk. Maple Leaf Foods’ plant in Brandon, Man., currently has COVID-19 cases and that has meant that it has had to suspend exports to China.

“Life has changed from everybody since COVID became a reality here in Canada. Uncertainty is probably the main word,” says DeBruyn.

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An outbreak of African swine fever, which infects only pigs, has decimated China’s herd, pushing Chinese pork prices to record highs and increasing the need for meat imports.

However, coronavirus — which has killed 563 people so far — is keeping consumers and workers at home in China, delaying purchases at stores and restaurants and slowing the unloading of products at ports.

The disruption exasperates Beijing’s efforts to ensure adequate meat supplies and the plans of global companies like Tyson and JBS to profit from the shortage.

The dual disease outbreaks also highlight the problems facing import-dependant China in its efforts to feed its population.

“There’s been disruptions at the ports,” Tyson CEO Noel White said on a call with analysts. “That has skewed shipments, receivals.”

China has increased meat imports from the U.S., Europe and Brazil as African swine fever has killed up to half its pigs since August 2018.

Beijing pledged to increase purchases of U.S. farm goods in an initial trade deal last month, raising traders’ expectations for more pork shipments. China also eased restrictions on U.S. beef imports and in November lifted a ban on U.S. poultry meat shipments.

But coronavirus has clouded the outlook for Chinese demand, White said, as cities have been quarantined. He said Tyson is still shipping meat to China and has orders on its books.

“Once we get past the coronavirus incident, whenever that might be, I do think there is going to be very strong demand,” he said.

Meat is shipped to China in refrigerated containers that must be plugged into electrical outlets once they are offloaded to keep products cold.

Importing companies normally receive containers as they arrive, freeing up space for others. But several Chinese ports are at capacity on space for refrigerated containers and outlets because few receivers are picking them up, said Peter Friedmann, executive director of the Agriculture Transportation Coalition.

Shanghai and Xingang have reported 100 per cent utilization of available plugs, he said.

Meat shippers are also scrambling, selling to other countries or shipping to other Chinese ports, Friedmann said.

“Things are really getting bad over there,” USA Poultry and Egg Export Council president Jim Sumner said.

— Reporting for Reuters by Tom Polansek and Karl Plume in Chicago.

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China said on Tuesday it wants the Canadian government to temporarily stop allowing meat shipments to China after bogus pork export certificates were discovered.

The move disrupts a lucrative pork trade for Canada, the world’s third-biggest shipper, and comes as China turns to meat imports after African swine fever killed millions of its pigs.

Canada and China are also embroiled in a dispute after the chief financial officer of Huawei Technologies was detained in Vancouver on a U.S. arrest warrant.

“It’s a big loss, a huge market,” said Martin Lavoie, CEO of Canada Pork International, an export marketing group. “You have alternative markets but (replacing) the volume of China, that’s the challenge.”

China bought $310 million worth of Canadian pork from January through April, making it Canada’s third-largest market by value. It is Canada’s largest pork market by volume.

Canadian pork exporters are likely to find other buyers, such as Mexico, the United States and the Philippines, but may have to accept lower prices, Lavoie said. Canadian pork processors include Olymel, HyLife and Maple Leaf Foods.

Buyers for specialty products such as pig feet may be hard to find, Lavoie said.

In the short term, more European pork is likely to flow into China, he said. The European Union is the world’s biggest pork exporter, according to the U.S. Department of Agriculture.

The United States, the second-biggest global pork exporter, is unlikely to benefit, since it is subject to a 62 per cent Chinese tariff, said Brett Stuart, president of U.S. advisory group Global AgriTrends.

Canadian pork that would normally ship to China could instead end up in the United States or competing with U.S. pork in Japan or South Korea, he said, but added the disruptions are unlikely to affect the direction of world prices.

“Global pork prices are moving sharply higher because of this surge in demand from China. It’s just beginning,” Stuart said.

In Canada, though, farmers fear that the prices they receive may dip. Industry officials are concerned China’s action may cost the sector $10 million per week, said Manitoba hog farmer Rick Bergmann, chair of the Canadian Pork Council.

China’s move also applies to beef, but Canadian sales to China amounted to less than three per cent of Canada’s beef exports last year.

An investigation by Beijing into Canada’s export certificates revealed as many as 188 “counterfeit” veterinary health documents and the existence of “obvious safety loopholes,” according to the Chinese embassy in Canada.

Ottawa has called in the RCMP to investigate, but the Canadian government is not convinced the fraudulent meat shipments come from Canada.

— Reporting for Reuters by Rod Nickel in Winnipeg; additional reporting by Tom Polansek in Chicago.

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Wholesale pork prices, known as the cutout, rose by $1.01 on Monday to $62.93/cwt for carcasses, according to U.S. Department of Agriculture data (all figures US$). On Tuesday, prices retreated slightly to $62.59, although that was still above the average of $61.50 for the last five days.

The gains were a turnaround after hog and pork prices slumped as farmers ramped up production and U.S. agricultural exports to China slowed. China last year imposed tariffs on imports of U.S. pork due to the trade war between Washington and Beijing.

“The market was looking for a bottom in the cutout,” said Altin Kalo, agricultural economist for New Hampshire-based Steiner Consulting. “It thinks that it probably saw one.”

Chicago Mercantile Exchange April lean hogs rose 0.575 cent to 57.9 cents/lb. and reached its highest price since Feb. 19. The market has rebounded from a contract low of 52.25 cents, set Feb. 20.

The U.S. is working on a trade agreement with China, which could increase demand for agricultural products such as pork. But U.S. President Trump will reject a deal that is not perfect, U.S. Secretary of State Mike Pompeo said in a media interview.

Traders are monitoring the trade talks and also the spread of African swine fever in Asia.

The highly contagious disease, which is incurable in pigs but harmless to humans, has spread rapidly across China since August, and has been found in seven areas in Vietnam, the state-run Vietnam News Service reported.

In the cattle market, most-active CME April live cattle settled up 0.475 cent at 128.825 cents/lb. The contract has retreated from a high of 130.45 set on March 1.

Traders are reluctant to buy cattle futures aggressively because index funds are in the process of rolling positions from the nearby April contract into deferred month contracts, said Mike Sands, president of MBS Research.

However, cold U.S. weather continues to underpin the market, he said. Cattle typically do not put on weight as quickly in cold weather because they consume feed to generate body heat.

“That’s still going to show up in terms of further erosion in carcass weights,” Sands said.

CME March feeder cattle futures lost 0.325 cent to settle at 140.875 cents/lb.

— Tom Polansek reports on agriculture and ag commodities for Reuters from Chicago.

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Forecasts for more cold, snowy weather in the middle of the country kept traders on edge after recent storms slowed transportation and weight gain in herds. Cattle typically do not put on weight as quickly in cold weather because they consume feed to generate body heat.

“These cattle are still going to be fighting winter conditions well approaching the middle part of March,” said Dennis Smith, a commodity broker for Archer Financial Services in Chicago.

Most-active Chicago Mercantile Exchange April live cattle settled down 0.075 cent at 129.85 cents/lb., after setting a contract high of 130.1 cents/lb. on Wednesday (all figures US$). The contract traded just below its high, reaching 130.05 cents on Thursday, and ended above its session low of 128.9.

June live cattle ended flat at 120.15 cents/lb. and reached a contract high for a fourth consecutive session.

“The market closed pretty strong even though it’s unchanged to slightly lower,” Smith said.

March feeder cattle futures lost one cent to 142.875 cents/lb.

Feeder cattle futures may come under light pressure on Friday from a U.S. Department of Agriculture report that was issued after the closing of trading on Thursday and showed an increase in the size of the nation’s calf herd, Smith said.

There were 94.8 million cattle and calves in the U.S. as of Jan. 1, up from 94.3 million a year earlier, according to USDA’s semi-annual cattle inventory report.

Beef cows, at 31.8 million head, were up one per cent from a year ago. The 2018 calf crop was estimated at 36.4 million head, up two per cent from the previous year.

“We’ll be well supplied with cattle this year on the feedlot side,” said Rich Nelson, chief strategist for Illinois-based broker Allendale.

In the swine market, CME April lean hogs, the front-month and most actively traded contract, rose 0.275 cent to 55.875 cents/lb. The contract has recovered slightly since hitting a low of 52.25 cents last week on concerns about large hog herds and low pork prices.

“Oversupply remains the driving force,” Nelson said.

— Tom Polansek reports on agriculture and ag commodities for Reuters from Chicago.

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Pork prices have taken a beating from the Sino-U.S. trade war, with China’s retaliatory tariffs affecting demand from the South Asian country, which is the world’s biggest pork importer.

Mississauga, Ont.-based Maple Leaf said it expects continued uncertainty in the fresh pork markets, citing trade tensions, potential for increased supply and outbreaks of African swine fever in China.

Beijing has reported more than 100 outbreaks of the disease since August last year. African swine fever does not harm humans but is deadly to pigs and there is no vaccine or cure.

Maple Leaf, which owns the Greenfield Natural Meat, Prime and Schneiders brands, said sales rose about two per cent to $893.9 million in the fourth quarter, while gross margin fell eight per cent.

Excluding items, the company earned 29 cents per share, missing analysts’ average estimate of 34 cents, according to IBES data from Refinitiv.

Maple Leaf’s net earnings slumped 80 per cent to $11.9 million, or 10 cents per share, in the quarter ended Dec. 31, as the company recorded a $40.7 million charge related to its investment in a poultry facility in Ontario.

In November, Maple Leaf said it planned to set up a $660 million poultry processing plant at London, Ont., with investments from the federal and Ontario governments.

In its year-end outlook Thursday, Maple Leaf said it plans about $400 million in capital expenditures in 2019, including about $250 million on the London plant’s construction.

The company also said it plans to continue to build up “leadership” in both sustainable meat and refrigerated plant-based proteins in 2019.

Work to that end includes transitioning all sows under company management to open housing systems by 2021, and continuing to build its presence in both Canada and the U.S. in RWA (raised without antibiotics) retail and foodservice meats.

In plant-based proteins, where Maple Leaf owns the Lightlife and Field Roast brands, the company said it will target “consistent double digit-growth in sales supported by new product innovations and investment in capacity to meet demand.”

— Reporting for Reuters by Debroop Roy in Bangalore. Includes files from Glacier FarmMedia Network staff.

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Lean hog futures also rose in a turnaround from a slide to contract lows last week.

Traders focused on the wintry weather as forecasters predicted more snow will fall across portions of the U.S. Plains and Midwest this week.

Snow and cold already hampered transportation in recent days and slowed weight gain in cattle herds, which consume feed to generate body heat.

“As long as the weather is restricting things, there is going to be pretty good support,” said Matt Wiegand, a risk management consultant and commodity broker for FuturesOne.

Most-active Chicago Mercantile Exchange April live cattle advanced 0.7 cent to 129.925 cents/lb. and set a contract high of 130 cents/lb. (all figures US$). March feeder cattle futures gained 0.95 cent to 143.45 cents/lb.

CME April lean hogs, the front-month and most actively traded contract, rallied 1.825 cents to 55.725 cents/lb.

Wholesale pork prices, known as the cutout, also edged higher. The carcass value was $60.96/cwt, up from $60.92 on Monday and $59.01 on Friday, according to U.S. Department of Agriculture data.

“You’re not seeing a lot of hogs make it into town with the conditions that we have seen out there,” Wiegand said.

The hog market was oversold after the April contract dropped to a low of 52.25 cents/lb. on Jan. 20, traders said. Short-covering helped lift prices, they said.

“You’ve got that market low enough that you are going to see some bottom pickers,” a broker said.

— Tom Polansek reports on agriculture and ag commodities for Reuters from Chicago.

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