Thursday, September 19, 2019

China Hog Companies in an Expansion Race

China's hog-farming companies posted steep year-on-year declines in sales last month--more evidence of China's shrinking pork supply--but they are also in a race to expand production capacity by building huge hog complexes of 500,000 head or more.

Reports issued by China's three biggest publicly-listed hog-farming companies showed their combined sales of 2.17 million head during August 2019 were down 39 percent from August last year. Wens Corp. sales were down 34 percent from a year ago, Muyuan's sales were down 37 percent, and Zhengbang's sales were down 29 percent. Sales for the entire year from January to August were more robust due to large sales in the first half of the year.

Wens and Muyuan both said their plunge in August sales was due partly to holding back sows for breeding and keeping hogs on feed longer to take advantage of high prices. Wens' monthly hog sales were at a record level this year until they plunged in August to the lowest volume in the last 5 years. Wens adjusted its swine sales target for 2019 to 20 million head--down from 22.3 million last year and 20 percent less than the target set at the beginning of the year. Muyuan has not changed its target sales for the year, but it will be hard to achieve at the current rate of monthly sales.

Wens, Muyuan, and Zhengbang are the leaders of the top-20 hog-farming companies that are leading what the Ministry of Agriculture calls a "transformational upgrade" of the hog sector that was long dominated by small family-operated farms. Most are privately-operated, several began as bootstrap ventures raising a few pigs or birds, and most are listed on stock exchanges in China. Only COFCO and Guangxi's state farm company are state-owned. While the top companies are expanding rapidly, their combined sales of 68.5 million head last year accounted for less than 10 percent of the industry's production last year.
Top 21 pig farming  companies, production in 2018

CompanyMillion head
3Zhengbang Sci-tech5.54
4New Hope3.10
8Hubei Xiangda2.20
12Shuangbaotai (Twins)1.45
13Shanghai Guangming1.40
17Dekang Nongmu1.00
19Shanxi Daxiang0.94
20Guangxi State Farm Yongxin0.80
National output, 2018693
 Share of national output9.9%
Source: China hog industry summmit forum, February 2019.

Hog-farming companies had generally poor financial results in the first half of 2019. Biosecurity investments, higher spending on feed and personnel, and facilities for manure handling and bioenergy production (presumably methane gas produced from hog waste) are raising costs, but industry analysts think Chinese hog-farming companies returned to profitability in the second quarter of 2019.

With prices soaring, each company's profitability now depends on how many pigs it can produce. This is setting off what pork industry analyst Feng Yonghui calls a new "pig super cycle."

Soaring "pig concept" stock prices are funding aggressive expansion by listed companies. Many have announced intentions to build huge new breeding-farming-slaughter projects. A representative of Zhengbang company said the "severe challenge" of ASF crisis gives "the best opportunity to win for the strong."

During a visit to a Wens Corporation breeding farm director Wen Zhifen pledged to carry out Vice Premier Hu Chunhua's directive to restore pork supplies by producing 70 million hogs to account for 10 percent of the market supply by 2020. Wens announced a 1-billion yuan investment in a million-head hog project in Liaoning Province.

Shuangbaotai (Twins) Co. announced a plan to build a series of 4800-head model sow farms in a Yunnan Province county that potentially could supply 1 million hogs annually.

Last December, Muyuan announced plans to raise 3.5 billion yuan for a 4.75-million-head expansion of hog farming projects this year. In August Muyuan announced a plan to spend 120 million yuan to set up subsidiary companies in six hog-producing counties.

Feed company New Hope--also engaged in poultry--was the only top hog-producing company that had healthy profits in the first half of the year. New Hope identified hog production as its "strategic transformation initiative" and set a target of producing 25 million head by 2025. New Hope has announced ambitious swine investment plans:
  • 3.75 billion yuan in a 2.5 million head project in Lanzhou
  • 980 million yuan in two projects in Hebei Province totaling more than 1.1 million head
  • a 7500-head breeding project in Shandong Province
  • a 2-million-head hog project in Anhui Province
  • 483 million yuan in a 500,000-head breeding-farming project in Henan Province, including a 3000-head grandparent farm and an 18,000-head multiplier farm
  • a 500,000-head breeding-farming-slaughter project is under construction in Guangxi Province's Laibing prefecture, and additional projects totaling 600,000 head are planned in other cities.
Also in Guangxi Province, Zhengbang has 6 farming projects under construction with investment of 3 billion yuan and plans to build 10 additional projects in the province with investment of 5 billion yuan. A Zhengbang spokesman said the company has a 3-million-head expansion plan focused on Guangxi.

Less prominent companies are also getting into the act. Liyuan Grain and Oils Group--headquartered in Guilin--is collaborating with a Danish partner on a planned 3600-head great grandparent and grandparent farm that will be the nucleus of a million-head breeding system in Guangxi.

While it sounds like big companies about to replace small farms, most of these plans still rely on recruiting cash-strapped individual operators to fatten hogs. Muyuan is one of the few companies that actually conducts the entire hog-raising process on company farms. Most of these projects use a "company + farmer" model that supplies piglets from company-operated breeding farms to individual farmers who fatten hogs to slaughter weight in their own barns. (A few companies are experimenting with models that maintain company ownership of hogs raised by contractors, but such arrangements are still not that common in China.) Farmers will still need to invest in biosecure farms and manure treatment facilities. New Hope has experimented with giving farmers financial services but most farmers will struggle to come up with funds for start-up costs as well as working capital.

Not all companies are thriving. The no.-7 company, Chuying--the first hog-farming company to be publicly listed in 2010--had its stock suspended when it fell below 1 yuan per share. In 2018, Chuying ran into severe financial problems, tried to pay off bonds with hams, and reportedly had pigs starve when it couldn't pay for feed.

No comments: