So, the slow-motion car wreck continues moving down the track. But the NASCAR race car that was China rolling over and over a couple weeks ago has come to a stop. South Korea, Japan and Italy are still rolling over and over. Hopefully, with great crumple zones, driver buckled in and a great medical crew in place, the U.S. will come out of this crash in good shape. Hopefully.
The situation in Japan and South Korea is important to U.S. beef producers because they are our No. 1 and 2 export customers. Their economy, their restaurant activity and tourist traffic are important to sales. China is more important now as a destination for our competitive meats, pork and, to some extent, poultry. We do not want to see competitive meat supplies backing up, presenting too tempting an alternative to beef.
Their success is also important to the agricultural economy as a whole, to diversified farms selling pork and poultry and several packers who sell two or more meat products. Of course, we want to sell beef to China but it may be awhile before their volume catches up to Japan and South Korea.
As of the first few days of March, China’s economy was starting to shake it off and get back to work. China claims 90 percent of workers are back on the job at state-owned companies. Their Purchasing Managers Index (PMI) said 80 percent of medium- and large-sized businesses have been reopened. But only 58 percent of “migrant” workers have returned back to their work cities, according to a report in the Wall Street Journal.
Another story said only 30 percent of small and medium business had reopened. This is China. Who knows for sure?
As for “migrant workers,” these are not workers from another country. These are Chinese workers whose family lives in usually rural parts of China but who work in one of the big cities or industrial provinces, sometimes hundreds of miles from home. Many of them went home for the Lunar Holiday, and then got trapped at home by a quarantine. Going back to their city job meant a 14-day quarantine when they got there. So many of these workers have been slow to return to work.
Two of the provinces at the epicenter of the outbreak and centers of manufacturing and export for China have downgraded their emergency status. One has had no new cases for nine days running.
So unless there is a secondary outbreak when factories run again and businesses reopen, China’s problems will shift more from disease control to financial problems stemming from lost wages, lost company revenue and payments to be made. Larger companies are burning through cash but have some reserves, and can borrow. Small companies do not often have very big reserves and have problems getting loans from state-owned banks. But multiple sources say banking regulators are telling banks to cut small businesses some slack on debt and credit card payments in the first half of the year.
South Korea is much earlier in the curve, with the number of cases having mushroomed quickly from a handful in mid-February. Their number of cases have topped 4,000, with 26 deaths by early March. They have been testing aggressively, testing tens of thousands and building a new testing facility in a matter of days. They have been trying very hard to find cases and shut things off. Their biggest problem has been a church with thousands of attendees in a highly populated city. A 61-year-old lady—obviously quite religious—went to four services on one Sunday and later was diagnosed with the virus. Hundreds of cases trace to that one incident.
Japan has tracked cases in two groups: those from inside the country and those from the cruise ship, which has been their biggest problem. Early in March, they counted almost 300 cases, not including over 700 on the Diamond Princess cruise ship. There have been six deaths. Some of the cases in the U.S.—brought to quarantine facilities here—trace to that cruise ship.
Schools in Japan are closed for the month. Japan has been criticized for not testing enough, so their numbers could be a low-ball count. With all the disruption, however, February’s auto sales were down only 10.3 percent.
Many things are connected to something else. Chinese ports have been undermanned because of the virus outbreak. Transportation by truck away from the ports has been spotty. Only the railroads seem to be keeping up. But shiploads of frozen pork and poultry have overwhelmed destination ports. So now, cold storage warehouses on the U.S. West Coast are backing up with pork and poultry because China is short of places to put it. Some ships have been rerouted to other ports as places to hook up to power frozen containers have run out.
U.S. Meat Export Federation’s Joe Schuele said the West Coast warehouse situation is showing some improvement, compared to January. November and December pork exports were regarded as “astonishingly high,” yet recent weeks have rocked along at 16,000 metric tons/week, 20 percent higher than at year’s end. The demand for U.S. pork is there, it’s just that Chinese ports are backed up. According to sources, there is not much slack in U.S. cold storage on the West Coast, so it didn’t take much to overflow the capacity.
Because of the structure of the Chinese economy, companies in countries like Japan, South Korea and the U.S., who depend on Chinese components for their manufacturing, will likely see their supply stream get back up to snuff relatively faster. The bigger Chinese companies, especially state-owned ones, could get going more quickly. That could get Japanese and South Korean manufacturing up and running faster, generating income and demand as soon as factories are ready for parts.
But most of the Chinese workforce is employed by small and medium-sized companies, who have struggled more to get back in gear. That will have more impact domestically, as those families will not have as much income and companies will not have revenue or pay wages as quickly.
That could pose problems for the Chinese banking system. One report said roughly a third of China’s regional banks would not meet their capital reserve requirements if the GDP dipped to 5.3 percent and over half if GDP dropped to 4.15 percent, according to the World Bank. Banks not getting payments or getting delayed payments would exacerbate the problem for the banking system. While Chinese officials are hoping companies can avoid layoffs, there are some industries, especially in the service sector, that are not going to see much revenue right away, yet have fixed costs to deal with.
While exports account for roughly 15 percent of U.S. beef production now, half again as much as a few years ago, in some ways, it is good we are not like Australia (70 percent) or Canada (44 percent), where a much higher percentage of production is exported. It is too early to see just where we are on the virus curve but hopefully, we will peak in March. — Steve Dittmer,WLJ columnist
(Steve Dittmer is the author of the Agribusiness Freedom Foundation newsletter.)
