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Swine Fever Risks to Investment in U.S. Agriculture

African swine fever has killed about 200 million pigs in China and U.S. hog and soybean farmers are worried. A good measure of the swine fever risks to investment in U.S. agriculture is the fact that local news outlets are featuring this story in farm country. The Herald Sun, published in Durham, North Carolina writes about the spread of African swine fever in China.

It first appeared in China last August and since then it has spread like wildfire, decimating China’s pork industry and affecting millions of pigs across that entire country.

From there, African swine fever has spread to Vietnam and crept into Cambodia, killing even more pigs.

Now, farmers in North Carolina watch nervously, hoping the disease doesn’t make it across the Pacific Ocean.

“I am terrified. Every pig farmer I know is terrified,” said Jan Archer, an owner of Archer Farms in Goldsboro, which has more than a thousand pigs.

African swine fever isn’t harmful to humans, but it is especially fatal to pigs and spreads quickly. Rabobank, a Dutch bank, estimated the disease will affect 150 million to 200 million pigs in China, the biggest pork producer in the world, this year.

One side of the coin is that China’s loss could be a huge gain for U.S. pork producers as they could export massive quantities of pork to China to make up for their production shortfalls. The other side of the coin is that this disease could spread to the USA to hog producing areas and devastate herds just like is happening in China.

Even if just a few cases occur in the USA and the disease is otherwise contained, it would kill U.S. hog exports. That is because African swine fever is a “trade-limiting” disease.

If just one outbreak were reported in the nation, then exports of that product from anywhere in the nation would halt, until further studies could be done or the disease is cleared. Concern is so high that the disease could travel to the U.S. that the World Pork Expo in Iowa was canceled for just the second time in its history.

North Carolina hog producers export about 25% of their product. Having to store instead of export hog products would drive many farmers and meat packers out of business. Farmers are gearing up for strict quarantines where anyone coming onto a farm will need to strip, shower, and change clothes. They won’t even be able to bring their glasses onto the farm.

Soybean Farmers and Others Are Hurt by African Swine Fever in China

Pigs need to eat and soybeans are a major part of a hog’s diet. Because China has (or had) three times as many pigs as the USA, they need to import soybeans to feed their herds. The reduction in the pig population in China translates into a lesser demand for soybeans and reduced U.S. soybean exports. This means that U.S. soybean farmers will be hurt but so will allied industries. CNN reports that Wall Street fears could hit Deere and other stocks.

A trade fight with the U.S. isn’t the only war China is fighting. African swine flu has decimated the pig population in China and sent pork prices soaring. As many as up to 200 million Chinese pigs have reportedly been lost due to the disease.

Now, Wall Street analysts are scrambling to assess the fallout from the fast spreading illness and how to invest around it.

J.P. Morgan has downgraded Deere to underweight on concerns about the “rapidly deteriorating fundamentals in U.S. agriculture.” This is due not only to the trade war, but also the decline in soybean demand in China as a result of the reduction in the hog herd due to the outbreak of the African swine flu.

Swine fever risks to investment in U.S. agriculture include companies like Deere. Deere makes tractors, combines, and other farm machinery. If U.S. soybean farmers lose customers in China because they have fewer pigs, they will buy less equipment from Deere. If U.S. pig farmers are hit with the swine fever and have to cull their herds, the results for companies like Deere will be even worse.

 

One of the Swine Fever Risks to Investment in U.S. Agriculture is sales of Deere farm equipment.

Deere Combine Harvesting Soybeans

 

Other companies mentioned in the CNN article include the venerable meat packer, Hormel as well as Philbro, Darling Ingredients, and Blooming Brands.

Trump Trade War Multiplies Risks for U.S. Agriculture

Forbes writes that handouts from Trump won’t save soybean farmers. The swine fever epidemic in China is not the first problem for American soybean farmers. But, it may be the nail in the coffin for many.

The price of soybeans has plummeted over the past year since Trump started putting tariffs on Chinese products and China retaliated. The USDA estimates that the average price per bushel fell from $9.33 in 2017 to $8.60 last year. At 4.54 billion bushels that was a $3.3 billion impact to soybean farmers. However, the shortfall should be worse this year since last year farmers were able to forward sell a portion of their crops at $10 per bushel.

As the chart shows below shows with a per bushel price in the low $8 area, unless prices turn up soon 2019 will be a disastrous year for soybean farmers. For a business that runs on low margins losing over 20% of revenue with high fixed costs is a recipe for bankruptcies.

Here is their chart.

 

One of the swine fever risks to investment in U.S. agriculture can be seen in the fall of soybean prices.

Soybean Prices Fall

 

The key to understanding this problem for soybean farmers is that soybean farming works on margin. When there are heavy rains, like this year in the Midwest, farmers plant later and get less of a yield. When the price falls because demand is less, they make less even with a bumper crop. And, when a trade war cuts off their largest foreign customer, many soybean operations working on margin go bankrupt.

Investments in U.S. Agriculture and Tracking Bankruptcies in Farm Country

American Banker writes about soaring bankruptcies in Farm Belt and how banks need to become more defensive or get dragged down by debt defaults.

Banks that serve U.S. farmers are increasingly restructuring existing loans and boosting the collateral needed for new ones as the numbers of late and missed payments have risen.

While regional banks are healthy, they’re clearly boosting their defenses against the risks they face. In March, a report by First Midwest Bank in Chicago showed past-due agricultural loans up 287% in 2018 over the previous year. Meanwhile, cases handled by the Iowa Mediation Service involving farmers unable to make payments rose 20%.

Farmer bankruptcies in six Midwest states rose 30% to 103 in 2018, according to the Federal Reserve Bank of Minneapolis. To hold back the tide, Farmers National Bank in Prophetstown, Illinois, is restructuring more and more loans to keep growers solvent while trimming the bank’s own risk.

The point here is that this situation is a threat to the banking industry as well. This problem for investment in U.S. agriculture predated even the Trump trade war. But, reducing orders from the largest market for U.S. farm exports like soybeans made things worse. Now the swing fever risks to investment in U.S. agriculture have compounded the dilemma along with an unusually wet spring, late planting, and a smaller-than-hoped-for crop. The swine fever risks to investments in U.S. agriculture may be felt very widely and bear close attention.





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