By Hendrik Tuch, Head of Fixed Fixed Income – Aegon Asset Management

While Covid-19 continues to grab headlines, we should not disregard the economic effect of another virus which is steadily spreading across the globe. The African swine fever virus does not affect humans but is very contagious and often lethal for the affected swine population. Since its discovery in Kenya about 100 years ago, we have seen outbreaks in different regions, mostly in Western and Eastern Europe. In 2018, it reached China with devastating effect on local pork production, culling measures and other restrictions resulted in a reduction with 40% of its local pig herd. Pork is a staple in Chinese cuisine, with an average annual consumption of 30 kg per person and therefore a major influence on Chinese inflation measures. The doubling of local pork prices after the virus outbreak pushed Chinese inflation numbers up from a relatively stable 2% rate to over 5% at the end of 2019. Since then, local prices have dropped from their peak in 2019, reducing Chinese inflation to near zero at the end of 2020.

Let’s now consider the global consequences of the swine virus outbreak in Asia. In the aftermath of the pig crisis, local authorities released most of the Chinese strategic pork reserves to limit local shortages and further price spikes. Since then, Chinese government agencies have started to replenish pork and other food reserves, with imports of pork, soybeans, corn and wheat all increasing with at least 50% in 2020. This significant agricultural import expansion is partly due to the US-China trade deal as agreed at the start of 2020, but is also related to the rebound of production in the Chinese pork industry. The purchases done in the first half of 2020 were well timed, as global agricultural prices were generally lingering at depressed levels, after several years of global bumper crops. At that point, institutional investors had lost their faith in commodity markets, especially after the implosion of the oil price in April last year. The prevailing market view was that due to the coronavirus, demand for practically all commodities would remain subdued for quite some time.

However, since September last year we have seen a significant turnaround in price trends of many agricultural commodities. Market prices of corn, soybeans and wheat have all risen strongly in the last few months, with both corn and soy showing a price increase of over 70% since their lows early in 2020. As mentioned, the Chinese purchase programs certainly contributed to these price trends, as well as the depreciation of the dollar throughout 2020. Another factor is the dry weather conditions prevailing in South America at the start of the last planting season. But we should not rule out that the ongoing central bank balance sheet expansion might be pushing investors into assets which cannot be printed or bought by central banks. Some market analysts even predict that we have started a new commodity super cycle, with further price increases ahead. If we take the previous high of the S&P GSCI as a reference, we would need to see a doubling of all commodity prices to get back to this level. Personally, I don’t think it is likely we will see such a strong move in the coming years, as it would require oil prices to double as well, which is doubtful considering the global supply surplus in the oil sector. But a further rise of agricultural prices may cause other problems going forward, especially in low income Emerging Markets. Many EM countries are already facing poor economic conditions due to the coronavirus, add to this a considerable rise in food prices and we have the recipe for problems. The eruption of the Arab Spring revolutions is considered to be linked to a lack of economic progress in combination with rising food prices. In a similar mechanism, the African swine virus might be key in toppling governments in coming years as their electorate demands economic change.