According to the 2012 Hog Slaughter Industry Analysis Report an industry-wide audit and rectification program closed 26 percent of China's hog slaughter facilities during 2012 (the dimsums blog reported on this campaign in February). The Ministry says there are now 14,720 hog slaughter enterprises, including 4,585 "designated" slaughter enterprises.
China's pork industry has added hundreds of large mechanized slaughter facilities with global-standard food safety and sanitation controls, but thousands of older rudimentary slaughter facilities still operate alongside them. According to the report, China's hog slaughter industry utilizes just 42 percent of its capacity. Its annual processing capacity was 850 million hogs but actual volume was reported to be 355 million head. The audit program reflects a strategy of shutting down small facilities that lack required equipment and facilities to remove excess capacity and consolidate the industry by brute force.
|China Hog Slaughter Industry, 2012|
|Item||Unit||Value, 2012||Percent change|
|Number of slaughter enterprises||Number||14,720||-26.2|
|"Designated" slaughter enterprises||Number||5,919||-22.5|
|Small scale slaughter points||Number||10,135||-27.7|
|Gross income||Billion yuan||271||2.80%|
|Average hog purchase price||Yuan/kg||15.73||-8.1|
|Ex-factory carcass price||Yuan/kg||20.68||-7.2|
|Value of assets||Billion yuan||106.4||11.9|
|--above scale enterprises||Billion yuan||95.3||13.7|
|Source: China Ministry of Commerce.|
By comparison, U.S. pork industry statistics listed 71 U.S. slaughter plants with capacity to process 445 million hogs in 2009. Another table listed less than 30 U.S. plant closings between 1993 and 2009. Chinese authorities closed over 5,100 slaughter facilities in one year.
The Commerce Ministry report cited excess capacity and a low degree of concentration as major problems facing the Chinese pork industry. The report pointed to the high degree of concentration in pork markets in the United States, Holland and Denmark as presumably superior to China's small, scattered collection of slaughter facilities. The report said China's biggest companies--Shuanghui, Yurun, and Jinluo--have expanded rapidly and invested in slaughter, processing, cold chain, and testing facilities, but the degree of concentration is still low.
The volume of hogs processed by Chinese facilities reportedly rose 4.1 percent during 2012, despite having shut down 26 percent of slaughter facilities. This suggests massive consolidation, but the share of hogs processed by the top 50 enterprises rose only 1 percentage point, reaching 14.8 percent in 2012. "Above-scale" enterprises (20,000 head per year) accounted for 78 percent of volume, up 2.4 percentage points. The value of industry assets increased 11.9 percent despite the loss of a fourth of the facilities.
The report also worried that the Chinese pork sector remains a low-margin sector with minimal value added. The slaughter sector largely kills and cuts up pigs on commission for wholesalers. The primary product is a "hot" carcass that is carved up later the same day by a retail butcher within miles of the processing facility. Packaged and chilled meat cuts constitute only 10 percent of the pork market, and processed meat products account for only 15 percent. There is little product differentiation or branding, says the report, and profit margins are 1.8 percent of gross income.
In a low-margin sector there is little ability or inclination to invest in equipment and facilities to address the industry's chronic problems with food safety and environmental pollution. The report says some operators are conscious of food safety, but a series of food safety incidents results because many operators flout food safety regulations and the testing system is "imperfect." The report notes that hog slaughter facilities generate large volumes of waste water. But the treatment costs to mitigate their "heavy pollution" are high, too high for many small facilities to bear. With heightened concerns about pollution, more municipal authorities are expelling hog slaughter enterprises--either pushing them underground or into the hinterland far from cities.
The expansion of high-end facilities on top of a vast network of thousands of low-margin butchers has created a confused multi-tiered Chinese pork industry. The audit/remediation campaign represents an attempt to consolidate the industry by brute force by shutting down the low-end processors/butchers. In theory, eliminating these competitors should allow the remaining big enterprises to raise prices and expand volume to cover the higher costs of modern facilities.
The first point of confusion is over how big the Chinese pork industry is. There are multiple statistics on China's hog slaughter total ranging from 223 million to 698 million head:
- 698 million hogs--China's National Bureau of Statistics (NBS) official hog slaughter total for 2012.
- 355 million hogs--The Ministry of Commerce report slaughter number for 2012--about 51 percent of the NBS number.
- 270 million hogs slaughtered by "above scale" enterprises (more than 20,000 head per year) in the Commerce report--39 percent of the NBS number.
- Adding to the confusion, the Ministry of Commerce reported monthly hog slaughter statistics on an official website for monitoring the pork industry. Adding up the monthly numbers yields an even smaller number: 223 million hogs--32 percent of the NBS number.
How can we reconcile these slaughter statistics? The difference between NBS and Commerce statistics reflects to some degree the persistence of onfarm and small-scale butchering in the countryside that is not captured by the Ministry of Commerce. As many as two-thirds of China's pigs may be slaughtered on farms or by small butchers and don't show up in the Ministry of Commerce's statistics. However, the statistics are probably not accurate. It is unclear how NBS manages to accurately track and measure small-scale farms and butcher points. Many farms and butchers have an incentive to evade regulatory and statistical authorities. However, others have incentive to exaggerate numbers to collect subsidies for sows, hog insurance and vaccines. It is likely that NBS slaughter statistics are overstated and Commerce Ministry statistics are understated.
The statistical problems are a reminder that China's pork sector is a confusing multi-tiered market that includes:
- farmers killing pigs for their own consumption,
- small farms and butchers that supply small retail vendors and restaurants,
- modern supply chains for supermarkets and high-end food service establishments.
These segments or tiers operate in parallel with blurred and ever-shifting boundaries. Most supermarkets and high-end restaurants are supplied by the modern supply chains but some procure pork from small butchers and underground swill-feeding hog farms. "Wet market" vendors and small restaurants mainly procure pork from small butchers and associated brokers and dealers, but an increasing share of these outlets are procuring from "modern" supply chains. Perhaps 25-30 percent of rural residents raise their own pigs (down from 60 percent in the 1996 agricultural census), so few "farmers" kill their own pigs--most buy their pork from markets or eat in restaurants.
To make things more complicated, retail outlets may shift their source for pork from month to month depending on market conditions and whether government officials are in crackdown mode. Supermarkets and butcher booths displaying large photos and descriptions of modern-looking hog farms may actually get their pork from small butchers. In some cases, the retailers may intentionally deceive their customers, and in others the retailers themselves may be duped by their suppliers about the source of their pork.
There is really no way of knowing the true number of hogs slaughtered and sold in China, but the various hog slaughter numbers indicate that China's "modern" commercial pork market is much smaller than official slaughter numbers indicate.
The Commerce Ministry's report indicates an industry in a state of flux. The Ministry is one of nine departments--including police, agriculture, sanitation, environmental and other authorities--engaged in more aggressive monitoring, education and enforcement to "root out criminal networks" to stamp out "black dens," "black workshops," and "black markets." The report doesn't acknowledge it, but these efforts often lapse when one or more of the nine stove-piped departments lose interest or officials from higher levels go home. Sometimes these efforts create other problems--a campaign to shut down a network of diseased meat dealers in Shanghai and its hinterland last year resulted in farmers dumping their dead pigs into rivers (instead of selling them to butchers as was customary).
The report calls for continued efforts to consolidate the industry using sticks and carrots. There will be continued audits and shut-downs of substandard enterprises, as well as "encouragement" and subsidies to companies to invest in integrated supply chains, retail networks, upgraded facilities, testing equipment, information technology to facilitate traceability, and water treatment equipment. Medium-range plans call for increasing the share of products sold as packaged or processed products. The processing industry is to restructure with big companies investing in cold chain and interregional sales networks. There is also an initiative to develop the meat industry in border regions and areas populated by ethnic minorities.
The bottom line is that authorities have failed to provide a consistent, clear regulatory environment to govern the pork industry. Thus, the industry or "the market" has not been able to sort out problems on its own. Citing "market failure" (which is really regulatory failure), other arms of the government have jumped in to restructure the domestic industry by brute force--shutting down substandard butchers and giving subsidies to others to buy equipment, build facilities...and buy companies overseas.
Returning to Shuanghui, it remains a mystery how a company operating in a low-margin industry could scrape together $4.7 billion to pay a substantial premium to buy the shares of Smithfield Foods, a much larger and more valuable company (and take on $billions of Smithfield's debt). The massive investment in an overseas company is ironic given that the Chinese pork industry is utilizing less than half its existing processing capacity and is chronically short of capital investment.
A possible explanation is that Shuanghui needs a reliable supply of quality pigs that is walled off from the chaotic Chinese hog farming-slaughter industry and the only way to get a reliable supply is to find it overseas. It is probably no coincidence that Smithfield is known as a proponent of the vertically-integrated management model that Chinese industry mavens see as the future of China's pork industry.
The Commerce Ministry's report gives the impression of a long, slow slog to upgrade value-added and net margins in the Chinese pork market. There will be a market for high-end branded (Smithfield/Shuanghui) pork products in China, but it will be a tiny sliver of the market for the foreseeable future. The five-year plan set a goal of increasing the market for processed meat products in cities by 25 percent between 2010 and 2015 with a target market share of 17 percent in 2015. And that's the "modern" segment of the market which may be about two-thirds smaller than indicated by the NBS official slaughter statistics reported in the news media.