AgriCensus Report

ANALYSIS: Are US soybean ending stocks too low at 995m bu?

Last Friday the USDA published its first pass at global production and supply of soybeans for the 2019/20 marketing year.

Record stocks this year and next are on the cards, with US soybean ending stocks this year expected to fall just short of 1 billion bushels at 995 million bushels.

That will feed into substantial ending stocks next year of 970 million bushels: and that comes out even with a chunky 5% fall in production slated for next year.

To put that figure into context it is more than three times the size of soybean stocks at the end of the 2016/17 marketing year – before the trade war started – and equivalent to almost six months of domestic use.

But given the report was written before the escalation of the trade war between China and the US, are even these massive figures too low?

Last Wednesday, China’s government said it would retaliate against President Trump’s plans to tax more Chinese imports and on Monday the ministry of finance announced a raft of new tariffs.

But beside those retaliatory measures, few traders think China will make good on its politically-motivated goodwill purchases of soybeans that have been booked and not shipped.

Out of the 20 million mt of US soybeans China said it would buy during previous negotiations, it has to date contracted to buy just 12.5 million mt, according to USDA figures.

Given US exports sales for the current marketing year stand at 45 million mt versus USDA estimates made before the escalation of the trade spat 48.3 million mt, the ending stock forecast doesn’t take into account too much additional demand.

But that likely doesn’t take into account the prospect of cancellations of those goodwill purchases.

Out of the 12.5 million mt that have been contracted, just 5 million mt has been shipped, leaving 7.5 million mt to load out of US ports in the next 16 weeks if the USDA’s forecast ending stocks of 995 million bu is to be reached.

“As far as I can see, there are almost no fresh trades for US corn or beans from June onwards,” a US-based market source told Agricensus.

Given that dynamic, should China pull the rug on the existing purchases it is very likely that the psychologically-significant level of 1 billion bushels in ending stocks could be reached.

Brazil to benefit?

China has bought 42 million mt of those beans from October through April, and with five months to go it is expected to take the same again, according to government forecasts published Friday.

With China’s National Grain and Oil Information Centre estimating May and June deliveries at 7.5 million mt and 8.5 million mt, respectively, 27 million mt will need to land between July and September if the import target of 85 million mt is to be reached.

With those delivery dates equating to May through July loading out of Brazil or the US Gulf, and with Brazil having exported just 25 million mt out of a 70 million mt projection so far, Brazilian farmers will easily be able to cater for additional Chinese supply.

On Friday, in anticipation of a spike in Brazilian demand, soybeans traded on an FOB basis at the port of Paranagua in a huge 100,000-mt clip.

“Huge volume on June,” said one market source.

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Grain handler The Andersons posts loss on bad weather, weak demand

US grain handling company The Andersons has announced a $14-million loss in the first quarter of the year compared with a $1.7 million loss a year earlier, as pre-tax income in the company’s Trade and Plant Nutrient groups weighed on earnings.

The company, which is divided into a Trade, Ethanol, Plant Nutrient and a Rail Group, said the report included an $8.7-million adjustment related to its purchase of the Lansing Trade Group, which tripled the size of the company’s grain business.

The company’s Trade Group, which comprises more than 50 grain terminals in 11 states across the US, posted a $5.9 million loss compared to a $1.2-million loss a year earlier, with the company saying weak domestic markets, foreign trade uncertainty and the floods in Nebraska took its toll on earnings.

“Income derived from grain originations and the group’s assets was down slightly on limited farmer selling and diminished income from storing wheat; those results also included a $2.2 million insured loss due to property damage caused by heavy rains in Nebraska,” the company said.

The company’s Plant Nutrients Group, which includes fertilizer production, posted a $3.9 million loss versus a profit of $1.1 million a year earlier largely due to cold and wet weather hitting demand.

“Farmers may not have time or the inclination use as much fertiliser as anticipated in the face of low grain prices,” executives at the company said on a conference call on Tuesday.

In terms of the company’s ethanol business, it posted a $2.6 million profit compared with $3.1 million a year earlier, despite what the company said was a “weak margin environment” as the US suffered from an oversupply of corn that is being funnelled into ethanol production.

The company added that it had already hedged 40% of its Q2 ethanol production at “acceptable margins”.

However, Brian Valentine, the company’s vice president and CFO, told investors that any resolution to a trade deal with China would give a boost to ethanol and exports of DDGS.

“Short-term, we think it could be very positive for ethanol if ethanol is imported alongside DDGs,” he said.

“A trade deal with China would be a shot in the shoulder we’ve all been waiting for, especially ethanol,” he added.

The Andersons closed its purchase of the Lansing Trade Group earlier this year, buying out the 67.5% share of the company it did not previously own from Macquarie Bank and Chinese meat processing company New Hope.

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Bolsonaro freight pledge to freeze markets if enforced: sources

Pledges made by Brazil’s president to hike minimum truck freight rates, and enforce them in order to head off a new trucking strike, would cripple internal trade in soybeans and corn, market sources said Monday.

Last week, President Bolsonaro pledged to reflect an 11% rise in diesel prices in government-set minimum freight rates, a move that came after several trucking unions warned that they would repeat last year’s strike in response to rising diesel prices.

A repeat of a strike would likely once again cripple the economy and movements of Brazil’s commodities.

Although wholesale diesel prices fell sharply in October and November last year and were largely stable in December and January, prices shot up nearly 11% in February and again in March.

They have risen an additional 5.6% in April so far, while minimum freight rates have been held unchanged.

“The agreement is not 100% clear because it was just an attempt to avoid a strike. We don’t know what the new rates will be, but a sort of agreement has been reached. But like any other cost, it is the farmer who will in the end have to pay for it,” said Steve Cachia, of Brazil-based brokerage Cerealpar.

Cachia estimates that freight rates will have to increase 4% to compensate for rising diesel prices.

Last year, the minimum freight table was brought in to compensate truckers for what they said were unsustainable price hikes in the cost of diesel.

In Brazilian law, the minimum freight rate has to be revised if diesel prices move 10%.

While initial estimates suggested that it could add $50-80/mt on the cost of shipping soybeans and corn from the interior to the ports, enforcement of the law has not been robust.

“At first, sellers only wanted to sell (crops) FOB interior and buyers only want to buy CIF delivered. So far, there is no news of inspections and fines and freight rates for spot positions are negotiating below the table anyway,” one market source said, requesting anonymity.

“If they follow the table, inspect and fine, the market will come to a halt and it will take some time to adjust,” the source said, adding that costs are transferred to the ones who contract the freight.

A third source agreed.

“There is some buying FOB interior, but many won’t take the risk. We saw this last year and I expect we will see the same [reaction] if the government is serious,” said the third source, who also requested anonymity.

The news of higher costs comes as the price of soybeans futures has fallen sharply, dragging soybean prices in real terms at the port of Paranagua to a three-month low, according to Agricensus data.

“I’ll tell you the truth, nobody knows what will happen, probably [not even] even Bolsonaro,” said Aldo Lobo, an analyst with brokerage Granopar.

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Market sceptical of ban as EU glyphosate review gets underway

The herbicide glyphosate will continue to be used by farmers globally for the foreseeable future unless a suitable and safe alternative is found, despite the recent rise in public concern on the safety of its use, market sources told Agricensus.

Pressure on the use of the herbicide and its maker Monsanto, now owned by Germany’s Bayer AG, has mounted in recent months after two US cases ruled that the chemical caused cancer in two groundsmen.

Bayer has been ordered to pay a combined $114 million in damages and has seen its share price fall by over 20% since last August.

A similar case in France ruled in favour of a farmer who is now seeking €1 million ($1.1 million) in damages from Monsanto.

And most recently Vietnam has announced it will ban the use of the crop.

But the biggest threat to Monsanto is an EU decision over whether to renew its licence when it expires in 2022.

That process will start in December this year, with the review led by the Netherlands, France, Hungary and Sweden, which together have accepted the heavy workload this Monday.

Despite several EU member states indicating that they could ban its use, few think the EU will announce a blanket ban, preferring instead to leave it to member states.

“There will be immense pressure both ways, but without a reliable, safe alternative I think they’ll extend for another five years,” one market source said regarding the EU’s licence renewal.

The stakes are high, with the EU claiming that the review will be undertaken by experts in four countries and not just one, as is the usual process, claiming the “very large application dossier and the related high workload” was too much for one member state.

Besides, no country volunteered to review the chemical on behalf of the bloc, not after the controversy of the last review, where German agencies were accused of bias by relying too heavily on scientific evidence submitted by Bayer.

Prevalent

The use of glyphosate – commonly known as Roundup – is so prevalent that there are nearly 200 retail products on sale in the US alone that contain it.

On an industrial scale it is estimated to be used on 80% of genetically modified crops – that amounts to the vast majority of soybean and corn production globally.

Proponents of its use say that there is no alternative and that it prevents crop failures by maintaining row crops.

Opponents say that there are biological and natural substitutes.

In writing this piece, Agricensus contacted eight consultants and analysts for comment. None were willing to speak publicly about the herbicide, with several stating that they did not want to anger big clients.

A US-based market analyst speaking on condition of anonymity said about potential safety reviews of its use that “it’s going to be years before it really has any market impact,” as there is no clear substitute available.

Over 95% of the corn and soybean planted in the US is genetically modified to make it resilient to Roundup and dubbed Roundup-ready seeds.

Those seeds, also sold by Monsanto, give higher yields as weeds are more easily removed by blanket application glyphosate enabling more space and nutrients to get to the crop.

Yet a ban would not be as dramatic to yields as initially thought as alternatives have been found for other once key banned herbicides and pesticides over the years.

Glyphosate is unlikely to be any different.

Brazilian famers used the same GMO seeds as they apply a no-tilling approach to farming, a technique that reduces erosion of lands, but which requires significant amounts of glyphosate.

“Farmers will fight any national ban that might come up – and farmers have huge influence on Congress and government here,” a Brazilian market analyst said, who again spoke on condition of anonymity.

However, if there is a push from the buyers of soybeans and corn – for this read China, Southeast Asia and the EU – to ban row crops that have been treated with the herbicide, then that may pressure growers in North America and South America.

And collectively, the Americas accounts for more than 70% of the world’s corn exports and 80% of soybeans.

“If bans occur in countries that import Brazilian soybeans, that’s a different story. If they stop buying, Brazilian farmers will have to adapt,” the analyst added.

A ban on the chemical is therefore not expected to impact yields drastically, rather the profitability of farms using glyphosate-intense techniques such as no-tilling will be hit badly.

The EU review is due to conclude in October.

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Late flourish for Brazil soybean yields, B11 delay could cap premiums

Brazil’s late summer flourish for soybean yields could have a bigger impact on future price rises than normal, market sources have told Agricensus, as the additional volume produced has occurred in a state that typically does not forward sell its crop.

Over the past two weeks, both official forecasters and private analysts have increased their projection of Brazil’s soybean crop.

The USDA last week said the crop would be 500,000 mt bigger than it previously expected at 117 million mt, while Brazil’s food statistics agency (Conab) said the crop would be 300,000 mt more than expected at 113.8 million mt.

The trigger for those revisions are better-than-expected yields in southern states such as Rio Grande do Sul, which have experienced much needed rains following weeks of dry weather.

However, with most farmers in Rio Grande do Sul typically selling on a spot basis as opposed to selling forward, a greater percentage of this year’s crop has not been sold compared to previous years.

“The fact is, in Mato Grosso, for example, farmers sell a lot in advance, in Parana a little less, and in RGDS much less they are ‘spot sellers’. So, now with the harvest around 70%, the farmer selling is around 25-30%, while in Parana 55-60% and Mato Grosso 70% has been sold forward,” said Aldo Lobo, an analyst with Granopar.

A second source agreed.

“The farmers (in Rio Grande Do Sul) start harvesting after the majority of states. And they are much more prone to sell the spot for a forward fixing level. That’s very bad because these southern growers will limit the upside potential for our basis.”

With Brazilian farmers tending to sell soybeans now and fix prices later, there are now concerns that the additional volume from Rio Grande Do Sul could be priced as soon as there is an uptick in premiums.

“When (premiums) pick up, farmers fix prices. And this works as a ceiling at premium ports,” the second source said.

Number two

Such has been the turbulent weather across Brazil, that Rio Grande Do Sul is set to overtake Parana as Brazil’s number two producing state for soybeans after Mato Grosso.

The state typically produces around 17-18 million mt, with around two-thirds of that destined for export.

However, this year, production is expected to exceed 20 million mt, while Parana’s crop is set to fall.

Meanwhile, local demand will not be as high as previously thought after the government delayed the start of the roll out of Brazil’s B15 mandate – whereby all diesel sold would need to comprise of 15% biodiesel.

“The entire sector was expecting at least a 10% rise in biofuel demand due to the B11 mandate (in June). But the government has postponed the hike start. This leads the market to an more even bearish sentiment when it comes to spot prices,” said the second source.

Other market sources disagreed with such a bearish picture, saying much will depend on the outcome of trade talks between the US and China.

“Farmers can also hold on to their crop for as long as they want down there. They hardly have any warehousing costs as co-ops don’t actually charge them for that,” said Steve Cachia, an analyst at brokerage Cerealpar.

“So you have years even in a record crop situation when down south you can have a false and forced scarcity, which in turn forces premiums higher. Eventually it depends on demand outside Brazil, and how aggressive buyers are to get hold of the crop,” he said.

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China mulls ending US DDGS anti-dumping probe amid trade talks

China may be exploring ending the anti-dumping investigation into US DDGS imports after the ministry of commerce responded to a request from the US Grains Council to review the current situation, market sources have told Agricensus Tuesday.

President and CEO of the US Grains Council, Tom Sleight, confirmed that the council had raised the question of the review with the Chinese government.

Documents seen by Agricensus sent by the Chinese Alcoholic Drinks Association (CADA) to two separate companies, state that the ministry has received a request from the US Grains Council to re-evaluate China’s anti-dumping and anti-subsidy probes on US DDGS.

DDGS are an animal feed produced as a by-product to the production of alcohols like ethanol, typically using corn as a feedstock.

CADA is a central umbrella group that oversees China’s burgeoning ethanol production sector, with the letter sent by the association asking for the companies to submit details on their income over the last year, and their current DDGS production levels.

They are also asked to evaluate the potential impact on domestic companies and farmers’ incomes in the event that the probes are terminated.

All responses are required to be returned by April 10, according to the document, with CADA then submitting a summary to the ministry’s Trade Remedy and Investigation Bureau within a week.

The move sparked some excitement across Asia markets in early trading, although it stops short of greenlighting the restoration of US exports to the country as it appears to amount to another goodwill gesture rooted more in symbolism.

For the US, limits on DDGS exports into China predate the current trade war, with a series of measures enacted against US DDGS that has massively reduced the country’s export outlet.

In 2016, China was the biggest customer for US DDGS, soaking up 2.3 million mt over the year before a series of import duties slashed the competitiveness.

That slashed exports to 371,667 mt in 2017, with further measures paring that figure back to 206,657 mt in 2018, according to data from the US Grains Council.

As of January 2019, the latest month for which export data is available, China imported just 1,918 mt of US DDGS, down 91% on the same month of 2018.

“It is good news, but it will depend on how the trade talk goes,” one corn importer told Agricensus, although he expected that the review could be completed prior to the end of trade talks.

The impact on the feed market in China was not expected to be significant, according to market sources, as domestic production only accounts for one or two million mt, while soymeal has been relatively cheap this year and demand has been hit by African swine fever outbreaks.

“If the trade talks do go well in April, this should be approved,” a second China-based source said.

“We did ask the ministry of commerce to review the tariffs, as per their rules. This was not at the request of US Trade Representative,” Tom Sleight, president and CEO of the US Grains Council told Agricensus.

The Chinese Alcoholic Drinks Association declined to comment when contacted by Agricensus, while no comment had been received from the US Grains Council at time of publication.

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Brazil first quarter soybean exports surge 30%

Brazil exported 17.2 million mt of soybeans over the January-March period, an increase on the 13.2 million mt exported over the same period last year because of an earlier harvest this year.

The most apparent gains were made in February when exports more than doubled year-on-year to 6.1 million mt.

Brazil exported 8.96 million mt of soybeans during March, up almost 2% from the same month last year, government data shows.

Volumes in March are typically higher than the first two months of the year as the harvest picks-up pace hitting a peak in April and May.

The year-on-year increase in March was due to an earlier harvest alongside heavy rainfall in some states that affected the pace of progress for most of the month. 

But analysts have said dryer weather toward the end of the month prevented a decline in production and continuing dry weather could result in better yields in April as the southernmost states increase planting, putting pressure on farmers to sell more beans. 

Official estimates suggest Brazil will export 70 million mt of soybeans this year, down sharply from the 84 million mt exported last year.

For corn, exports over the first quarter totalled close to 6.9 million mt, up 41% on the first quarter of last year when exports totalled 4.9 million mt. 

Exported volumes over March totalled 891,900 mt, up 47% on March 2018’s volume of 605,300 mt volume but down on February and January’s totals of 1.75 million mt and 4.22 millon mt respectively.

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ADM Q1 profits set for $50-60m hit caused by floods, cold weather

Agribusiness major Archer Daniels Midland said Monday that flooding across the US that has destroyed grain and oilseed stocks and swept away silos will reduce its pre-tax operating profit by up to $60 million this quarter.

The company – the ‘A’ in the so-called ABCD quartet of companies that dominate agribusiness alongside Bunge, Cargill and Louis Dreyfus – said the bulk of the hit would be shared equally between its carbohydrate solutions and origination businesses, which include corn trading and ethanol production.

“Rail transportation has been disrupted throughout the region; our corn processing complex in Columbus, Nebraska, was idled due to flooding and currently is running at reduced rates; and unfavourable river conditions since December are severely limiting barge transportation movements and port activities,” ADM said in a statement.

The US Midwest has suffered a severe winter as record-breaking cold weather that has hit corn processing volumes due to a slowdown in rail and truck transportation.

And earlier this month, heavy rains have meant widespread flooding across major corn and soybean growing areas and shut 10-17% of ethanol production capacity, according to various estimates.

“Taken together, we expect these severe weather disruptions to have a negative pre-tax operating profit impact to ADM of $50 million to $60 million for the first quarter,” the company said.

Q1 operating profit for the carbohydrate solutions and origination business was $213 million and $45 million, respectively.

ADM is the first major agribusiness to outline the financial damage the floods will have.

Earlier on Monday, the USDA said it was assisting farmers in Iowa and other communities affected by the flooding.

The floods will likely hit corn plantings and boost soybean plantings, some analysts say.

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US police seize huge haul of smuggled Chinese pork amid swine fever outbreak

On Friday, US border police announced their biggest agricultural overhaul seizure in the US: more than 1 million lbs of Chinese pork were found being smuggled into the port of New York in Newark.

The bust, which involved more than 100 customs and border protection officials and dogs, found the meat hidden in 50 containers of food and detergent products.

“The pork was smuggled, from China, in various different ways including in ramen noodle bowls to Tide detergent,” said Troy Miller, director of New York field operations for the US customs and border protection.

The outbreak is alarming because it comes as China is battling with a deadly outbreak of African swine fever (ASF).

The announcement comes as the oilseed and feed market speculates the size of the impact of the current outbreak in China, home to half of the world’s pigs.

Official government figures show that at least 1 million pigs have been culled in 115 outbreaks across the country since August last year.

But virtually no-one believes those figures, with most analysts claiming the figure is much higher.

Nor does the market believe that the disease is on the wane, despite the official figures showing exactly that.

Looking at official reports from China’s ministry of agriculture shows that there were five incidents in August, rising to 25 in September, hitting a peak of 27 in October and falling away to just five incidents in February.

On Monday, the USDA said the size of China’s herd will fall 13% by the end of the year, saying many outbreaks have not been reported because provincial governments typically do not report the disease to the federal government.

“Some contacts have reported instances where individuals were actually discouraged or prevented from publicizing outbreaks in their region… a hog manager in Shandong Province was allegedly arrested for reporting an ASF outbreak to the national government, after his reports to local government were ignored,” the USDA said.

In addition, the compensation paid to farmers is less than half the market value of the pig, leaving many to cull pigs and sell the pork as uncontaminated meat.

“At this point, it is unclear when China’s government will have sufficient control over the ASF situation to convince domestic industry to begin restocking and expanding. Many in the swine industry are still taking a wait-and-see approach to ASF in making business decisions,” the USDA said.

Miller of US Customs and Border Protection said if the disease spreads to the United States, it could cause $10 billion worth of damage to the nation’s pork industry in just one year.

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FACTBOX: What could be on China’s agriculture shopping list?

The US and China have for the past three months been locked in discussions about how to overcome a trade dispute that has slowed Chinese economic growth and seen the US-China trade balance slump to a record low last year.

Last month, Chinese imports from the US fell almost 20% compared to January, while its exports to the US fell 14.1%, indicating that the trade war is starting to bite almost a year on from when it started.

Over the weekend, Chinese officials from the ministry of commerce told journalists at an annual press conference they were working “day and night” to reach an agreement that would “remove all the tariffs imposed on each other” so that normal trade relations can resume.

So far much of the focus of the US administration has been on the so-called structural issues of intellectual property theft and an enforcement provision that China has refused to accept.

The main thrust from the US is how to address a trade balance with China that has ballooned from $268 billion a decade ago to a record $420 billion last year.

Bloomberg News last month reported China had pledged to buy an additional $30 billion worth of agricultural goods in an attempt to make a dent in to the trade balance and smooth the way for a trade deal.

The following is a factbox on what could be on China’s shopping list.

Soybeans

Soybeans is the jewel in the crown of US agricultural exports to China, although they have collapsed last year after China slapped a hefty 25% import tariff on US beans as part of the trade war.

Of $17 billion worth of US soybeans sold last year, China took just $3.1 billion, indicating that there is plenty of scope for this to increase by at least $10 billion to ensure exports returned to more historical 2016-2017 levels.

Any purchase above this would likely have to be done economically and come at the expense of Brazil – China’s biggest agricultural trading partner.

Wheat

The US has long since stopped being the marginal supplier of wheat to the world – losing that accolade to Russia.

Last year, the US exported $5.4 billion worth of wheat and just $100 million, or 400,000 mt, of that went to China, although that was particularly low last year.

US wheat sales to China have averaged around 1.5 million mt over the last five years.

If rumours that China could up that to as much as 7 million mt per prove correct, it would mean almost doubling its annual wheat imports but would still only make a $1.5bn dent in the trade deficit.

Corn/ethanol/DDGS

The US is a huge exporter of corn, selling 70 million mt or $12.5 billion of the grain on to the international markets last year.

However, China – itself a massive corn producer – has picked up just $50 million worth of that, raising expectations in the US that corn could be a big beneficiary of any trade deal.

However, ethanol and the animal feed Distiller’s grains (DDGS) would make for a more logical export target.

The US exports around $2.7 billion (6.5 billion litres) of ethanol each year with about 3% of that going to China.

It also exports around 12 million mt of DDGS each year worth around $2.5 billion.

In 2016 China took around 20% of that volume, but that has since collapsed to just 2%.

Ethanol probably makes the biggest sense, given China’s domestic target to blend 10% of the nation’s surging fuel demand with the alcohol.

While DDGS demand is likely to suffer in the wake of the African swine fever outbreak, China’s US ethanol imports have numbered over 200 million gallons in the past, a figure that could only increase as the E10 programme is rolled out more widely.

However, with China also intent on building its own domestic ethanol production capacity, any trade solution that includes ethanol exports could provide a short term fix and a longer term flashpoint.

Sorghum

The US exported around 4 million mt of sorghum, worth around $836 million last year and China took around 60% of this volume.

But the US has the potential to export double this volume.

In 2016, it exported 6.9 million mt worth $1.4 billion.

Meat

US exports of beef, pork and chicken totalled $18.2 billion last year, with beef accounting for $8 billion, pork $6 billion and chicken at $4.2 billion.

Of this, about $1.1 billion worth was exported to China, with beef exports amounting to $80 million, pork about $600 million and chicken $420 million.

However, with the ongoing outbreak of swine fever in China slashing the size of the hog herd there, most observers see a trade deal potentially triggering a huge rise in meat exports.

Sources in Spain and the US have already confirmed that Chinese buyers have been scoping the European and US market out for more pork imports as most analysts expect pork prices to soar in Q4.

Last week, Chinese forecasters JCI said they expected the size of the hog herd to fall by at least 10% – at least 40 million pigs, due to the infectious disease.

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