Can't Pass On Rising Feed Cost

The drought in the United States has created a lot of buzz in China and has been pushing up feed prices there.

The landed cost of imported corn is reported to be about 2500 yuan/metric ton, comparable to domestic Chinese corn prices. Chinese corn at northeastern ports is 2410 to 2430 yuan per mt and the price at ports in southern China is 2540-2560 yuan/mt. According to one report, the quality of corn coming from the northeast has declined and there is upward pressure on domestic prices.

The most significant impact is a surge in Chinese soy meal prices that began in early June and accelerated this month. The futures price rose from 3100 yuan/mt to 4100 yuan/mt over that period.

Feed production has been booming this year. Recently-released feed statistics show that compound feed production in China during the first six months of 2012 was 53.2 million metric tons, up 20.8 percent from last year. This large increase partly reflects a low base last year due to disease problems in the pig herd and low aquaculture production last year. June compound feed production was 10.6 mmt, up 11.8 percent from last June. One report says that feed companies have been doing well this year; some of the big ones have reported strong profits and earnings per share for the first quarter.

However, a feed mill manager in Guangdong Province interviewed in another report says his company will not be able to pass on the rising costs of raw materials by raising feed prices. The manager says he recently bought corn from northeastern China at 2600 yuan, up about 50 yuan. He says the price of soy meal has risen 700 yuan/mt since early June. Corn comprises about 60 percent of his feed and soy meal 20 percent. He says the rising raw material prices raise their costs about 6 yuan per 40-kg bag but they will only raise the price about 2 yuan. They're worried that they will lose steady customers if they raise the price too much. Hog producers in China are caught in a serious profit squeeze.

Hog producers can't pass on higher costs by raising prices either. Hog prices have been falling most of this year while feed prices have been rising. Large hog producers are seeing shrinking profits and small producers with weaker management are losing money already. The pork supply is plentiful and prices are falling. Facing the prospect of losses, hog producers try to substitute cheaper feeds to cut costs. However, prices of substitutes like wheat bran and fish meal are also rising.

Chinese farmers and feed mills under cost pressure are inclined to substitute cheaper, low-quality feedstuffs that are less nutritious and make animals more vulnerable to disease. Losses may induce farmers to cull sows too. This creates conditions for yet another cycle of disease and price fluctuations in the hog industry.