China has been unfortunate in the past few years in experiencing both animal and human disease that has been costly in terms of life and the economy.
Often, China is thought of as an exporter of almost anything, but the table has turned when it comes to food and to protein supplies.
Until the coronavirus outbreak, the timing was right for opening trade discussions with China as it reels from loss of productive farmland through contamination and loss of livestock through disease, in particular pig losses due to African swine fever. While the COVID-19 outbreak has disrupted the supply chain system, the country’s aggressive pursuit of meat supplies will resume and continue for some time to come. Last year, its red meat imports jumped by 65 per cent — largely due to a decimated swine herd but also because of a growing middle class that has an appetite for imported pork, chicken and beef.
In the past, the challenges were in getting through to China with product. But that has changed in the last year.
The Chinese have been busy worldwide inspecting beef, pork and poultry plants and granting them direct access to sale points with agreements to supply the home market. This translates into entire kill floors and shifts designated specifically for export to China. In addition, the country is taking more of the carcass and in the case of swine, the entire carcass.
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Exporting is not always easy as it is still a slow process. According to The Economist, a deal often involves 36 documents, 240 copies and up to 27 parties. Even though most of the global trade is conducted by 10 banks, only a quarter of them handle the appropriate documentation electronically.
That’s hard to imagine in a globalized world and with a perishable product.
North American food is being diverted to China via private agreements that still must go through the process of a trade. With the lack of digital standardization, there are delivery gaps as these agreements still do not address the logistical nightmare of export.
And banks don’t like being direct partners because it is short money. In other words they don’t make a lot from the transaction. For exporters there are also tariffs to fully appreciate and barriers such as fees, language, customs and terminology. Of overarching concern is the possibility of a shipment being rejected.
Why is this important information?
From the perspective of beef, pork and poultry exports, this all sounds like an opportunity. Cold poultry stocks in the U.S. have been designated for China which clears inventory. Cow slaughter is sharply up to meet domestic processing demand leaving space for finished product to be used or exported. Export demand is expected to be strong, which may equate to two possible outcomes: The price of food will increase to the consumer and the price of the commodity could increase back to the producer.
The unknown risk is the commitment risk.
When whole floors and entire production units are committed to one destination there is the risk of overproduction and price control. Think about times in the past when there was an open invitation to produce more meat or poultry based on one buyer. Expansion occurs, contracts are signed and then ignored, the market does not prove to be sustainable, and the producer stands to hold the loss.
The market could be pressured down by overproduction, pricing from the end-user, through the application of tariffs, rejection at arrival or in any production unit post-farm. It is the country that the slaughter is singularly designated for that has the power.
And this is China we are talking about.
China authorities will remember for generations any insult or injury. They are industrious and will find ways through technology to not only feed their own but feed you too.
A good example is apple juice. China is the world’s leading exporter of apple juice concentrate, with 60 per cent of American apple juice concentrate coming from China. Canada imports the majority of its apple juice concentrates from China.
Think about this. Canada has an abundance of apples with more than 21 million tonnes of apples grown in B.C., Ontario, Quebec and the Atlantic.
Trade agreements are interesting and they sound good, but it is important to have a full appreciation of both the possible and the pitfalls.
One of the greatest pitfalls is having a short-term vision. Processors will fill orders but if Chinese production increases or they refuse to pay the price, hold or reject product, we could see injury to producers.
Logistically, until we change the trade mechanisms and make it easy to trace and identify product, finance the trade and ensure compliance, there is a carry-over of the same risks. While it is most certainly true that there will always be demand, the technological advances, farming systems and processing solutions will evolve and China will again be looking inward for solutions to overcome its challenges, including the shortage of meat and poultry protein.