It Truly is a Small World After All
By Laura Temple
After a spring of cancellations and closures, the world feels smaller. An interconnected economy links countries and industries. Major events spread ripples widely, even to the soybean industry.
A novel strain of coronavirus, COVID-19, first appeared in Wuhan in east-central China. But it’s not the only recent disease with an epicenter in China to disrupt the global soy supply chain.
African swine fever (ASF) was a known threat in Africa and Europe. But in August 2018, it was detected in domestic pigs in China, likely spreading from Russia, according to the World Organisation for Animal Health. Its rapid spread through Asia and further into western Europe in late 2018 and throughout 2019 required significant culling of pig herds, especially in China.
And while deadly to pigs, ASF is not a risk to human health.
ASF Shifts Consumption Patterns
But it does impact human protein consumption.
“Pig numbers are down about 30-35 percent year-to-year based on official data from China,” says Larry Shonkwiler, senior commodity analyst for Advance Trading, Bloomington, Illinois.
That significant decrease in the world’s largest swine herd pressured meat demand.
“High pork prices have the natural effect of rationing, reducing demand,” explains Xiaoping Zhang, director in China for the U.S. Soybean Export Council (USSEC). He is based in Beijing.
“Chinese household pork consumption in Tier 1, 2 and 3 cities was less impacted because it is a smaller portion of diets and less price sensitive,” he says. “The biggest change was in the hotel, restaurant and institutional (HRI) sector, which turned to poultry.”
Shonkwiler cites available data supporting those observations.
“Pork demand in China was down just one percent in 2018,” he says. “But in 2019, after ASF spread, pork demand dropped 12 percent. At the same time, poultry demand increased 11 percent in 2019. There was an increase in aquaculture as well, but that is more difficult to track.”
Soybean demand adapted to the shift in protein demand. According to Shonkwiler, China’s soybean needs dropped 11.6 million metric tons from 94.1 million metric tons in 2017-18 to 82.5 million metric tons in 2018-19, a change of 12 percent. Soybean crush volumes decreased just five million metric tons. During this period, China imposed higher tariffs on soybeans, so U.S. exports to China dropped much more dramatically than overall Chinese soybean demand.
China’s rebounding soybean demand for 2019-20 is forecast at 88 million metric tons.
“My understanding is that ASF impacted China’s backyard pig operations the most,” he says. “Those rations included more scraps than soybean meal.”
Zhang adds, “The Chinese pork industry is trending towards large-scale farms and groups that integrate breeding through finishing operations.”
Those pork production systems do rely on soybean meal in feed.
But as demand for poultry and seafood increases, soybean meal use has shifted to feed those growing sectors, explaining the dip and recovery in demand.
ASF spread to other countries in Asia with pork production, including Laos, North and South Korea and Vietnam, with a less noticeable impact.
“Soybean meal use in Southeast Asia increased 600,000 metric tons in 2018-19,” Shonkwiler says. “In 2019-20, it’s projected to increase 800,000 metric tons. The growth may have been less than planned, but it’s still positive. It will be another 18 to 24 months until a new normal for the pork industry in Asia – especially China – is established.”
Coronavirus Disrupts Supply Chain
China houses critical supply chain links for most global industries. Each year, the country essentially shuts down for the Lunar New Year celebration, and businesses worldwide adjust to compensate for the annual closure. This year, the Chinese New Year was scheduled to last from January 25 to February 8, 2020.
But on January 23, 2020, Chinese authorities imposed a strict lockdown in Wuhan. Because the timing correlated so closely to traditional New Year celebrations, millions of Chinese were traveling to be with family. This expedited spread of the virus throughout the country, and lockdowns expanded to businesses, schools and even ports across China.
“In response, ports developed protocols to manage bulk vessel shipments,” says Eric Woodie, trade analyst for ISA. “That caused delays before and after the celebrations for bulk soybean shipments at all major ports. Once shippers and ports learned to manage the protocols, delays faded. Those learnings applied fairly universally to ports as coronavirus affected other regions.”
However, container shipments tell a much different story.
“Containers reach many more ports with completely different handling processes,” Woodie explains. “Many container shipping routes stop in multiple countries, usually including China.”
Chinese factory closures extended well beyond the planned New Year celebration, so fewer goods were shipped via containers. Fewer containers returned. Shippers were unable to secure space on as many container vessels on typical routes and containers, and space to ship them became harder to find.
“Typically, shippers have to manage dealing with one or two blank sailings per week during the Chinese New Year,” he says. “This year, they had three to four times that many blank sailings. To adapt to the changing protocols established by ports and vessels, container shipping lines redeveloped many routes.”
Given the container availability crunch, U.S. ag exporters reduced their sales of container shipments proportionally during the next couple of months, but anticipate normal activity by summer, according to Doug Grennan, vice president of international trade for Scoular.
“Fortunately, U.S. farmers and elevators can store soybeans until the right time to sell,” says Woodie. “Other countries, like Brazil, can’t do that.”
Staying Home Impacts Soy Demand
“The HRI (hotel, restaurant and institutional) sector suffered the biggest consumption change caused by COVID-19,” says Shonkwiler. “Because people were afraid to or not able to go out to eat, the sector’s protein demand – including soy-fed pork, poultry and seafood – and vegetable oil demand dropped dramatically.”
USSEC’s Zhang describes what happened in China as the first to experience the coronavirus.
“COVID-19 damaged the HRI sector severely, shutting down restaurants, cafeterias, fast food chains, shopping malls, amusement parks, events, gatherings, cinemas, schools and more,” he says. “January and February should be peak season for this sector, but not this year. There was literally no HRI demand here in February. People staying at home consumed less food.”
The Chinese government prioritized food supply, he adds. Policies ensured supply and affordable prices. Highway tolls for food transportation and revenue taxes were waived for a time.
“By March, we saw food businesses coming back as factories and offices reopened,” he says. “That trend continued as schools reopened in late-March to mid-April, and as more industry events are allowed in May. By June, the food supply chain can be nearly recovered.”
A similar pattern repeated around the world as countries and regions battled the spread of the coronavirus. HRI demand for food, including soy, meat and vegetable oil, dipped significantly.
“With many factors related to the coronavirus recovery still unknown, I estimate it will take regional HRI sectors six to nine months to recover,” Shonkwiler says. “But the potential for a global recession is very real, and that would result in less discretionary income, less eating out and less demand for high-quality protein. How the supply chain adapts remains to be seen.”
As in China, he emphasizes the priority to maintain integrity of the food supply chain. Globally, multiple points of origin for staples like soybeans reduce the potential for major delays.
“Food is a necessity that isn’t easy to cut back compared to industries we can better manage without,” he adds. “The food supply chain is a high priority to maintain during events like this.”
It is a small world, and soybeans link people, countries and industries. ASF and COVID-19 reinforce connections between soybean production and global customers, and the ability of the industry to adapt in the face of serious challenges.