China's scramble for piglets inflates prices

With obscene profits to be made, China's swine farmers are scrambling to buy scarce piglets, driving their prices to crazy-high levels. Soaring piglet prices are the most obvious indicator of a ballooning cost structure that is likely to lock in ever-higher Chinese meat prices for the future.

While live hog prices have come down slightly in early March, the price of piglets is still rising. The Ministry of Agriculture's average wholesale price for a piglet in the last week of February 2020 was RMB 84.07/kg, up RMB 9/kg from the first week of January and RMB 60/kg higher than the price in February 2019. One article reports prices of RMB 1700-1800 for a 7-kg piglet. Another article reports prices of over RMB 2000 for 15-kg piglets and comments, "While you've been buying face masks, giant pig farms have been scrambling to buy pigs." Wens Company, China's largest swine producer, announced it will award managers a cash bounty for every piglet they buy through the end of 2020.

China Ministry of Agriculture weekly wholesale prices.

Crazy-high piglet prices are driven by a simple equation of tight supplies, fat profits from finished hogs, and companies eager to grab market share as the industry rebuilds after the 2018-19 African swine fever epidemic. Many farms sold most of their herd during the spring festival holiday. Restocking of farms has been delayed by the shortage of pigs and by disruptions of commerce and transport during the novel coronavirus epidemic. Disruptions are easing, but piglets are still scarce.

The Chinese swine industry--egged on by government officials desperate to maintain pork supplies--has taken shortcuts that will likely prolong the recovery and lock in low productivity and high prices for the long run. One commentator notes that the four-month increase in sow numbers reported by the Ministry of Agriculture last month was achieved by farms holding back female swine that had been intended for finishing barns to breed them as piglet-producing sows. One commentary estimated that 40 percent of piglets are being produced from these converted sows.

The shifting of pigs from "meat to breeding" yields a quick bump in inventory statistics and quick profits for farms, but it also dilutes the quality of the herd. In normal times, sows are bred carefully to increase litter size, improve maternal qualities, produce a large number of litters, and to turn out vigorous and muscular offspring. Commentators observe that these "third generation" animals intended as meat animals do not recover as rapidly after giving birth, and many farms are culling them after their second litter. This means more animals need to be held back as replacements, further constricting the supply of meat animals, increasing the cost of feeding and housing a larger proportion of sows, and prolonging the industry's recovery.

The drying-up of live pig imports over the last two years is another indicator of Chinese herd neglect. Chinese breeders normally bring in a small but steady stream of purebred animals purchased from breeders in North America and Europe to renew the nucleus herd of Durocs, Yorkshires, and Landrace pigs. These animals are bred and multiplied to become highly-productive commercial sows. Surges of pig imports have occurred after previous epidemics of PRRS and PEDv, but customs statistics indicate China's imports of live swine during 2019 were just $3 million, the lowest value in 15 years. Monthly data show that imports of live swine stopped after September 2018--except for a single shipment of Danish pigs in August 2019. The timing corresponds to the onset of ASF and trade tensions with the United States and Canada--the two main suppliers of China's live pigs in 2017 and 2018.

Source: China customs data.

The cost of piglets normally rises faster than the price of live hogs when the industry is in expansion mode, and their prices fall when the industry is in retrenchment. Over time, however, the price of piglets has been ratcheting upward and consuming a greater share of hog production costs, especially as the rise in feed and labor costs has been curbed since 2013.

Costs of "above-scale" farms reported by National Development and Reform Commission surveys.

Piglet prices rose to more than double live hog prices during periods of high demand during 2007-15, and they tended to settle at a ratio of 1.5 times hog prices in "normal times." Since 2017, piglet prices have risen to 1.5 times live hog prices during periods of peak expansion, while the "normal" ratio has ratcheted up to double the live hog price. In late February piglet prices per kilogram were 2.2 times live hog prices. The rise in piglet prices may reflect improvements in quality of the animals, but it probably also reflects a rising cost structure on the more sophisticated breeding and multiplier farms that are prevalent in China now and an inability to churn out piglets fast enough to keep up with the industry's demand.

Ratios calculated from Ministry of Agriculture wholesale prices.

There are no data on other pig farm costs, but they are probably escalating as well. Land is a frequently-cited barrier to the current swine industry recovery, and you can be sure local officials are extracting high rents from newly-built pig farms on rural collective land. Scarce laborers not keen on being confined to pig farms for weeks at a time are surely demanding higher wages from farm bosses. Truck drivers have been demanding higher rates during the coronavirus crisis--and there's a good chance those rates will not go back to their original level after the crisis passes. For now, swine farmers making huge margins may be willing to pay the higher costs, but those higher costs may become a new normal and lock in for the long term.

This boils down to lower productivity, a higher cost structure, and a ratcheting upward of pork prices for the long-term in China. Only large farms that can spread costs over large volumes will be able to survive when hog prices fall back toward normal levels. Watch out for griping about "unfair" competition from foreign pork and nontariff barriers when Chinese hog prices eventually start to drop.