It's a deadly example of the butterfly effect, but who would have thought ticks sucking blood from warthogs in African savannas would lead to potential economic stagnation in the most-populous nation on earth?
But that's where we find ourselves. African swine fever has swept through China like a wildfire, and on into neighboring nations such as Vietnam, Cambodia and Mongolia.
Pork prices in China last week surged to their highest level in history, at $3.60 per pound. That's almost double the previous record high of $1.92 per pound set in 2016. Chinese inflation looks set to rise from 2.5% to north of 4.0% as a direct result.
Now the central People's Bank of China is caught in a quandary. The pork panic comes at a particularly bad time. China is contending with the U.S. trade war, and economic growth is slowing faster than anticipated by the central government.
Nomura, in a pork-prices report, warns of the "elevated risk of a wage-price spiral." Per-capita income is rising around 8.0%, though it is moderating. Higher inflation could force wages higher, leading to higher cost of goods and services, leading workers to demand greater disposable income, leading to higher production costs, and higher prices -- driving inflation higher, again.
Where does that lead? Think the era of "stagflation" that crippled the U.S. economy in the 1970s. Substitute the oil crisis then for a pork crisis now.
Public fear of higher pork or oil prices, and then higher prices in general, is a feature of a wage-price spiral. It causes workers on the shop floor to head to their bosses' doors and demand a raise.
The risk of that is likely to discourage the central People's Bank of China from any high-profile stimulus package now to bail the economy out. The central bank has been nibbling around the edges of stimulus by reducing the amount of cash banks have to keep on hand, but may now back off.
Persistent interest-rate increases by the U.S. Federal Reserve to counter the oil shock and stagflation led the United States into one of its worst recessions in 1981-82. Could the PBoC be forced into a tightening mode, instead of its current easing? It's something markets will have to watch.
Warthogs and bushpigs in Africa tend to harbor swine fever, with soft ticks spreading it between the species as well as giant forest hogs. These animals that have evolved alongside it are not harmed. The swine fever is also not harmful to humans.
The virus does, however, cause a fever in "white-skinned" and other domestic pigs. That turns into shivering, then hemorrhaging in the muscles and vital organs. Pigs are dead within days, with 100% mortality within two weeks reported in some outbreaks. There's no vaccine or cure.
The fever was eradicated in the Americas, and elsewhere, by the 1990s, through aggressive action. The sudden appearance of a disease in a new continent, Asia, has been devastating. Another outbreak is also sweeping through eastern Europe.
African swine fever first hit China in August 2018. It spread rapidly between October last year and this February, reaching virtually nationwide. My hometown in Hong Kong got hit this May. The Chinese government now claims to have the outbreak under control, but farmers suspect that officials have been covering up the extent of the damage to prevent widespread panic.
China has lost around 40% of its pigs. The central government's last report in April stated that 1.02 million infected hogs have been culled, but that's surely now a far higher figure. Vietnam claims to have culled 4.7 million pigs as of September.
Not surprisingly, China's pork production was also down 42.1% in the third quarter, compared with the same time last year. Now, Chinese pig farmers have become extremely risk-averse, and aren't looking to repopulate their pens. They're scared the swine will just die off again. They are also raising and killing hogs at a faster pace, just in case, leading to smaller, lighter hogs coming to the slaughterhouse.
Pork is highly popular in Chinese cuisine. So the sticker shock is translating directly into inflation. One side note is that the outbreak is pushing consumers to consider meat-free versions such as Omnipork, a Hong Kong-designed substitute made from mushrooms and pea protein. I've tried it, and find it a pretty close and very tasty proxy in dumplings.
Beijing actually has strategic pork reserves, a policy it began in 1996 to try to counteract food emergencies. Prices have climbed despite it digging into that mound of frozen pork on three occasions, releasing 10,000 tons each time, to ease public concern. It has around 170,000 tons of frozen pork left - a tiny fraction of the 55 million tons of pork China eats in a year.
"Simply put, the pork reserves are too small to have any real impact," Nomura's Asia economics team says in their report "China: The Impact of Slumping Pork Putput."
It's likely that pork prices will only climb higher as the impact of the culls and deaths nationwide feeds, literally, along the supply chain. Nomura predicts prices will peak around 75 yuan per kilogram at Chinese New Year, which falls on Jan. 25 in 2020. In China, the New Year is like Christmas and Thanksgiving rolled into one in the States, a time virtually the whole country is on the move, returning to ancestral villages to feast.
Heading into winter, the massive increase in the cost of pork is likely to translate to increases for other meats, particularly chicken. The price of poultry is up 14.7% in China, with the cost of lamb, up 15.9%, and beef, up 18%, rising even faster.
For now, the inflation comes only in the food portion of the consumer price index, which some economists break out under normal circumstances since food prices fluctuate more than other goods anyway. Consumers can, if need be, shift their choices to other less-expensive forms of food. Non-food inflation has been coming down in China, leading to a very confusing situation when people head to market.
The crisis in China is good news for U.S. farmers. Under normal conditions, China absorbs around 21%, or 1.9 million tons, of the 9.0 million tons in global pork exports. China has been the major destination for one-quarter of the 3 million tons in U.S. exports, but the figure fell by half in 2018 due to the trade war. Spain, Germany and Canada each ship more pork into China now than the United States.
Expect pork, then, to be a major component of any trade deal reached between China and the United States. China's pork imports are likely to surge 50% this year and by as much as 80% in 2020.
If the fever is eradicated in China, we could see a huge ramp-up in production followed by, in about two years, a glut of pork on the market. Prices would crash. Farmers would be hit by the opposite situation from now, with far too many hogs on hand.
For now, though, it's a great time to be selling pork. China is buying.