Source: Lisa M. Keefe, MEATINGPLACE, 7/3/19



The critical outbreak of African Swine Fever in Asia is likely to drive industry-wide reform in the hog production business, including in the U.S., while restaurant operators should brace for a protein price increase across species, said Mizuho Restaurant and Proteins analyst Jeremy Scott, in a note to investors.

Whereas cyclical mismatches in pork supply can typically be addressed in three to four months, ASF’s blitzkrieg across Asia and increased vertical integration in the pork business in the United States are expected to “drive meaningful changes” in the pork packing business in the next five years, Scott said.

This, while the global pork industry is adjusting to the ASF shock to supply over the next six months to three years.

“[Our] view on ASF in China is that it will be followed by a major industry reform, which will hamstring the breeder recovery and drive a more import-dependent period over the next five years,” Scott wrote. “Global industry response will call for a ramp up in hogs, but limitations on processing capacity and labor shortages are likely to be critical bottlenecks.”

This is overall good news for North American packers, as demand for imports in China is likely to boost prices, including for variety and offal products which have lost overall value since 2014. Scott estimates that a reestablishment of China trade could recovery $5 to $7 per head of that lost value in byproducts and variety meats alone.

The start-up of several new, large pork processing facilities is also increasing demand for available hogs, and producing more commodity pork for the markets. “Structural challenges of an increasingly vertically integrated industry will weigh heavily on the market,” Scott wrote. “[We] believe these headwinds will work to offset the tailwinds of ASF.”

On the dining side, he expects the cost increases related to ASF to begin to show up on the books in the fourth quarter of the 2019 calendar year, and move upward during 2020. “Analysis and conversations with protein producers suggest prices are set rise substantially (we estimage 20-30%) over the next 18-24 months for all protein (not just pork).”

On average, core protein represents about 30% of the industry cost basket, or 8-10% of sales. This is bad news for restaurant companies that already are struggling to recruit labor and manage labor costs.

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