Thursday, May 5, 2016

China's Incredible Shrinking Hog Herd

Hog supplies have shrunk and pork prices are soaring in China.

China's National Bureau of Statistics estimated that pork production during the first quarter of 2016 was down 5.9 percent from the same period a year ago. That shrinkage follows a 5.1-percent decline during the first half of 2015. If the numbers are accurate, they portray an unprecedented decline in pork supplies. During the "blue ear" disease epidemic in 2007, China's pork production fell 7.8 percent, but production nearly recovered the following year. This time the shortage is due to a years-long downward slide in swine inventories due to exits of small-scale producers who may not return.

Chinese pork prices have soared as the supply tightened over the past year. The National average retail pork price reported in April 2016 by the National Bureau of Statistics is up 35 percent from a year earlier. The Ministry of Agriculture says wholesale hog carcass prices are up 40 percent, and live hog prices are up 51.5 percent. 
Data from China Ministry of Agriculture and National Bureau of Statistics.

Meanwhile, feed prices have dropped. China's average corn price is down 19 percent, and soybean meal is down 15.6 percent from a year ago. The combination of high hog prices and lower feed prices means sky-high profits. Swine producers are in expansion mode, a major turnaround from the doldrums during the first half of 2015. A doubling of feeder pig prices since last year is evidence that the industry is in expansion mode. 
Data from China National Bureau of Statistics food prices in 50 large cities.

The March-May period is usually when pork prices hit a seasonal slump after the peak at Chinese New Year in January-February. But prices have been rising during March and April 2016. Last year, pork prices surged to near the record levels hit in 2015. In the early months of 2016, pork prices are shattering seasonal records. 

Beijing's municipal government has launched sales of frozen pork to ease pressure on local prices which have risen about 50 percent since last year. The program is part of the price-stabilization program which municipal governments subsidize designated processing plants to hold frozen pork in reserve to sell during periods of high prices or short supplies. Starting May 5, suppliers holding reserves will sell subsidized frozen pork to Beijing supermarket chains who will sell the meat at a discount in 121 stores until July 4. Retailers will also be prohibited from excessive price hikes.

A brief commentary from another Chinese pork news site is pessimistic that plans by Beijing and other local governments to inject frozen pork reserves into the market will have a significant impact on prices. The purpose of the program is mainly psychological, and doesn't adequately address the short supply. Another commentary attributes the tight hog supply to closure of many farms by local authorities, and asserts that local pork reserves are not adequate to tamp down prices.

A surge of pork imports into China is doing more to alleviate tight supplies than the release of pork reserves. According to the Ministry of Agriculture, imports of pork during the first quarter of 2016 totaled 286,000 metric tons, up 90.3 percent from a year earlier. Imports of swine offal during the quarter totaled 287,000 metric tons, up 48.8 percent.from a year earlier. By comparison, the plan 3,050 metric tons of frozen pork of pork reserves in the Beijing market over two months is modest.

The Ministry of Agriculture's recently released five-year plan for the swine industry that pins its hopes on expanding the production of cleaner, more technically proficient and more rational larger-scale farms. An interview with an MOA official explains that the theme of the plan is the necessity of transforming the structure of the industry to address mounting problems:

  • Increasing environmental pressure to control pollution from hog waste.
  • Binding resource constraints, including the shortage of land for hog farms and excessive reliance on external supplies of protein-rich feeds.
  • Import pressure: low productivity and high production costs make Chinese producers uncompetitive versus European and U.S. swine producers.
  • Looming threats from complex spread of disease 
  • Market fluctuations, including the current cycle that resulted in a reduction of production capacity.
The plan includes an obligatory objective of maintaining self-sufficiency in pork, but it places more emphasis on stability and structural change than growth in output. The two main objectives are to increase the "above scale" (farms producing 500 or more hogs per year) share of hog production to 52 percent and utilizing 75 percent of manure to produce biogas and organic fertilizer by 2020. The above-scale share was 41.8 percent in 2014, a 7-percentage point increase from the beginning of the 2011-15 plan.

The new hog industry plan has eight separate objectives that are not new. The main thrust is to push hog production further into the hinterland as farms are closed in the urbanized Beijing-Tianjin and Shanghai regions and in broad swathes of southern China where rivers and streams are vulnerable to water pollution. The plan calls for developing cold chain and marketing to facilitate the regional concentration of the industry. There will be more support to develop a strong domestic breeding industry, veterinary drug conglomerates, and environmentally-friendly feed additives.

Ministry of Agriculture officials hope that their planned restructuring of the industry will tamp down market instability. By reducing "blind" expansion by small-scale farmers, utilizing "early warning systems", and strengthening links between farmers and processors, officials expect hog supplies to become more stable.

Those with a long memory may recall that the 2006-10 five year plan also had a similar push for "modernization" of the hog industry which was launched in similar conditions. That five-year plan also began during a down-point in the hog cycle, a severe disease-related shortage of pork and soaring pork prices during 2007. That time, the government released a blizzard of subsidies that led to overexpansion and exacerbation of the cycle. It looks like the government backed off from the subsidy mentality of earlier price surges in 2007 and 2011.

The government also adopted a so-called early-warning initiative in 2009, promising to report regular statistics on the hog market. Some of that information is still reported but it is hard to find and provides little real guidance for producers or market analysts. The Ministry of Agriculture's statistics on swine inventories and slaughter appear to have drifted away from reality, and the National Bureau of Statistics reports almost nothing from its extensive monthly survey of hog producers.

The best thing the State Council could do is to give the Statistics Bureau support to conduct a once-and-for-all accurate and transparent count of pigs and farms in the agricultural census next January, acknowledge the true number of hogs, and overhaul the nation's pork industry statistics.

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