Chinese pork prices have moved above their break-even level after 3-to-4 months of deep losses. But an industry commentary on August 24 suggests that another cyclical downturn may already be on the horizon because profits never last long in the Chinese pork sector.
Prices are constantly fluctuating in China's pork industry. High prices and profits stimulate expansion which drives profits down. Losses ensue, producers exit, and tight supplies force prices up again, starting the whole cycle over again.
A build-up of capacity in 2012 (following high prices in 2011) led to a glut of pork in 2013. The generally slow economy, orders to cut back on official banqueting, and a brief bout of consumer disgust stimulated by thousands of dead pigs floating in Shanghai's Songjiang River curbed demand. The result was a dip in prices and steep losses from February through June this year. A farmer in Shandong said he lost 60 yuan (about $10) on every pig he raised from April to June. In July, pig prices rose above their breakeven level of six times the corn price and now the farmer is making 14 yuan per head.
The pork industry is now heading into the peak consumption season when school cafeterias start serving pork again and two holidays take place around October 1. However, some commentators warn producers not to get too optimistic. The industry still has a lot of capacity because few farmers liquidated sows during the down period. A number of pork companies have launched big projects recently too.
One industry analyst warns that the industry needs to recover the losses from the last few months before getting excited about a rosy scenario. Analysts warn that the hog industry is inherently weak and vulnerable. It's an industry of micro profits.
This is a reminder that a big industry is not necessarily a profitable one. A decade ago, a number of multinational investment banks piled into the Chinese pork industry, presumably based on the idea that the industry was a sure money-maker since Chinese people will eat more pork as they get richer. In July, Shenzhen's Yangcheng Evening News speculated that the Shuanghui Company's purchase of Smithfield was in reality a mechanism for big investment banks with stakes in Chinese pork companies to cut their losses and exit the volatile industry.
Another big operator with its home base in the Chinese pork industry filed for bankruptcy in July.
One Chinese analyst quoted in the Yangcheng Evening News explained the pork industry as follows: "I'm not optimistic about the massive inflow of capital. Some problems need time to solve; capital can't solve them." During the time of rising prices, said the analyst, foreign capital entered the industry but soon met a downturn. The analyst suggested that a large investment bank with stakes in both Shuanghui and Smithfield was using the deal to "cash out" of the Chinese industry after its years of baptism.