NEW YORK – Animal disease and trade disputes are factors that threaten to undermine optimism and heighten a sense of risk in the global pork trade, the Food & Agribusiness unit of Rabobank said in its Pork Quarterly Q2 analysis.

The spread of African swine fever has raised concern about the health of the global swine herd. Rabobank reported that European Union member states that depend on pork exports are moving quickly to defend against the highly virulent disease which has no effective treatment and no vaccine.

“Global herd health issues have the potential to disrupt traditional trade flows,” according to Rabobank. “While no current outbreak is expected to have the distortionary impact of AI (avian influenza) in poultry or BSE (bovine spongiform encephalopathy) in cattle, the spread of African swine fever into Central Europe is generating some concern.”

Also weighing on a positive outlook for the global pork trade is the current trade dispute between the United States and China, which Rabobank said will “…distort markets and weigh on pork values in North America, while creating some potential upside for producers in Asia, Europe and South America.”

The trade spat comes as the US records record hog inventories of 72.8 million head reflecting the increased production capacity and favorable production costs. Rabobank said recently imposed tariffs of 25 percent on US pork products will weigh on markets, but analysts maintained their 2018 outlook of 3.8 percent growth in hog supplies despite lower returns driven by recent developments in trade with China.

In China, Rabobank forecast prices to remain weak in the second quarter. Demand should improve with upcoming festivals and supplies of pork should be sufficient. “Beyond Q2, prices will likely rebound if the pace of farmers exiting production exceeds the pace at which large farms expand,” Rabobank said. “Reports are that some farmers have already begun liquidating operations and are exiting, but large farms continue to expand.”

Rising supplies of pork in the European Union are pressuring prices, Rabobank said in its quarterly report. Production growth and weaker exports are forecast to weigh on margins, however the trading bloc should see some growth in exports to Japan and South Korea. African swine fever continues to cause concern and uncertainty in the market.

A bright spot in the global pork trade is Brazil, which has seen exports to China and Hong Kong surge. The uptick in exports to those countries has offset the loss of access to Russia’s market for pork. Weak pork prices and higher feed costs continue to provide headwinds for pork producers in Brazil. “Based on current profit levels, we expect slower growth in production in the year ahead,” Rabobank said.

Rabobank also issued an optimistic outlook for Mexico. Hog production in Mexico started strong with a nearly 4 percent year-over-year increase, according to Rabobank, and the industry is poised for even greater growth. Mexican pork producers have seen strong margins in recent months, although they are lower compared with a year-ago due to higher supplies and weak markets in the US.

Rabobank forecast 3.5 percent growth in pork consumption in Mexico for 2018 as domestic demand for pork grows on lower prices for consumers and increased availability. Hanging over the Mexican pork trade is the renegotiation of the North American Free Trade Agreement (NAFTA), Rabobank cautioned.

“Economic uncertainty — tied to the outcome of July elections and ongoing NAFTA negotiations — also has the potential to impact future consumption levels,” Rabobank noted.

Hog inventories in Canada advanced 2.7 percent year-over-year in the first quarter of 2018. However, sow herd numbers remain flat at 1.3 percent year-over-year, Rabobank said in its report. Ongoing productivity issues are expected to limit growth in the sow herd during 2018, but long-term conditions are expected to improve. “Like the US, Canadian markets are struggling to quantify the impact of recently announced tariffs on US pork exports,” Rabobank said. “While it is expected that Canada may benefit from the US trade dispute with China, weaker US markets will remain a drag on prices in the near term.”