Tuesday, November 26, 2019

China Pig Bubble Bursts, Supply Still Short

Chinese pork prices have dropped about 20 percent in November. Most industry analysts seem to view the decline in pork prices as a temporary market correction, and they expect a moderate rebound because there is still a 15-to-20 mmt deficit in pork supply. Prices stabilized or started to increase again in nearly all provinces last week. An industry survey found that 60 percent of industry people expect a renewed increase in pork prices as preparations of traditional pork products to celebrate the new year begin in southern provinces.

The average carcass price at the Beijing Xinfadi wholesale market on November 24 was down 23 percent from its October 29 peak of 26 yuan per 500g, erasing about half of the 58-percent increase during October. The price is still 135 percent higher than its year-earlier level of 8.5 yuan per 500g.

Chinese news media are thick with propaganda about farmers rebuilding production capacity. Ministry of Agriculture officials at a press conference last week instructed news media to report good news to restore the confidence of hog farmers. A Chinese Academy of Ag Sciences official recited the party line that production has already begun to rebound and the overall meat supply is stable as increases in supply of poultry, beef and lamb and imports have filled in the deficit.

While officials spread the mantra of stability, the situation on the ground suggests an industry still on a knife's edge, with panic-selling and new disease risks tipping the market into a downturn despite a yawning supply gap that consumers are learning to live with.

Most analyses give a shout-out to government policies for reviving hog production, yet pork supplies are still tight. Slaughterhouses are operating at about 15 percent of capacity and some have idled their facilities due to heavy financial losses. Beijing's Xinfadi wholesale market is still receiving about 40 percent fewer hog carcasses weekly than a year ago. Likewise, pork trade volume in four Shanghai wholesale markets is also down 40 percent from a year ago. Last week, MARA officials acknowledged that restoring pork supplies is a time-consuming process and said their objective is to restore pork production capacity to 80 percent of normal by the second half of 2020.

Two analysts revealed that government officials have been informally ordering companies and slaughterhouses to speed up slaughter, stop hoarding pork, release their frozen pork inventories into the market, and refrain from raising prices at the end of the year. "This news spread all over the country," one analyst said. A BRICS analyst said it is unclear how much frozen pork companies are holding. At last week's press conference MARA officials said they were investigating pork inventories.

Indeed, increased sales of frozen pork are cited as another factor in the price drop. Normally, fresh and frozen pork are largely separate markets but frozen pork has been putting downward pressure on all pork prices. Note: these are inventories stored up by companies early in the year when panicked farmers were sending pigs to slaughter en masse--not government reserves.

Analysts say consumption has been dropping in response to high pork prices as consumers and food service establishments learn to cope with high pork prices. Xinfadi market's weekly report says 10 percent or more of carcasses had been returned to suppliers at the end of the day in October even though the number available was low.

Farmers have been raising bigger hogs in response to high prices, but they began to slaughter them in November when they saw prices start to fall (and, after all, they can't keep on growing forever). One analyst remarked that the market couldn't absorb the big hogs. Carcasses are larger than usual, which MARA officials said added "15 kg of meat" per carcass, filling in part of the supply deficit. However, Xinfadi's report remarked that the "big hog" trend produced a surfeit of fatty carcasses that are hard to sell. The fatty carcasses were often the ones sent back to the supplier.

Analysts report that farmers in scattered localities have resumed panic-slaughter of animals over worries about plunging prices and scattered disease outbreaks. Only two ASF outbreaks have been officially reported in November and three were reported in October, but one analyst commented that unconfirmed reports of disease outbreaks have been more numerous. The analyst worried that farmers had become complacent after several months with ASF apparently under control and had become lax in biosecurity measures. Another analyst commented that the onset of cold weather and big differences between day and night temperatures leads to outbreaks of other diseases. Two of the officially-reported ASF outbreaks were found in trucks carrying pigs into Guangxi Province and Yunnan Chongqing, pointing to the persisting risk of spreading the virus around the country.

At last week's press conference a Hong Kong reporter asked MARA officials about rumors of recurrences of ASF in Jiangsu and Shandong Provinces and wanted to know how officials would ensure no new spread of the virus. The officials said they knew about these outbreaks and had confirmed that they were not ASF. They were mixed infections of other diseases which officials said they had dealt with.

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