Moody's: China tariffs to hurt small pork processors most
April 17, 2018
by MEAT+POULTRY Staff
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NEW YORK – Small pork processors would feel the heaviest burden of China’s tariffs on US pork products, according to an analysis by Brian Weddington of Moody’s Investor Service.
The Chinese government released a list of 128 products targeted for higher duties. Pork products, recycled aluminum and other items were slapped with an additional 25 percent import duty. Fresh fruits, dried fruits and nut products, wine, ethanol, ginseng, and seamless steel pipes are subject to an additional 15 percent tariff.
At the time China announced the tariffs, Barry Carpenter, president and CEO of the North American Meat Institute (NAMI), said in a statement “…These retaliatory tariffs will disproportionately affect hardworking American pork packers and producers, who will bear the main burden of these measures in the form of lost revenue and restricted market access, particularly as US pork production is slated to rise this year.”
The tariffs come as some small pork processors are expanding their fresh pork operations in response to losses generated in recent years due to an oversupply of pork, Weddington said in his market comment. “A significant amount of this incremental hog processing capacity has just come on line or is scheduled to over the next year or two,” he explained. “If China imposes tariffs on US pork, these expansion plans could lead to operating losses.”
Unlike their larger competitors, many smaller pork processors lack established connections to export markets. Additionally, smaller processors lack production capacity to produce retail packaged meats to absorb excess supplies of pork, Weddington said.
“As a result, these operators would have to sell more pork products in the US market at prices that may be below costs,” Weddington reported. “Hog farmers would be especially hurt as processors eventually would need to shut down production lines and would demand fewer hogs.”
Meanwhile, the effect of tariffs would be muted for major processors such as Smithfield Foods, Tyson Foods, JBS USA, according to Weddington. Vertical integration and a diverse portfolio of protein offerings provide some relief to the large pork processors. These major processors also have access to all the major pork export markets — such as Mexico, Japan, South Korea and Canada — where they typically export 20 percent to 25 percent of their output.
“These companies would continue to have ready access to alternative export markets for US pork, although prices in other markets would likely soften due to increased supply from the US,” Weddington explained. “Because of its single protein focus, Smithfield likely would be affected more than diversified processors, at least initially. However, we believe that Smithfield’s global leadership in pork gives it advantaged access to alternative markets that would allow it to offset the negative effects more quickly than others.”
Specifically, Smithfield can ship pork exports to China from its pork processing operations in Romania and Poland. Additionally, parent company WH Group controls Henan Shuanghui Investment & Development Co. Ltd., China’s largest pork processor.
Other mitigating factors for the largest pork processors include the decline of pork exports to China. In the last five years, exports of US pork to China have retreated 11 percent. But exports to other parts of Asia — where pork demand is rising — continue to climb higher, Weddington said. Exports to Japan have jumped 11 percent, while exports of pork to Mexico have climbed 1 percent.