Tuesday, April 7, 2020

Financing Holds Back China Pig Farmers

"It used to be that poor people raised pigs; now only rich people can raise them." This was a comment from a pig trader named Li in China's Henan Province reported by a Caijing Magazine piece documenting the financing obstacles preventing many family-operated pig farms from getting back into business.

Li said companies are throwing around money as they hoover up scarce piglets to restock farms. Companies will pay 2000-2200 yuan (roughly $300) for a 15-kilogram piglet, Li said. With the high cost of piglets, restarting a mid-sized farm can require a 10-million-yuan investment that is out of reach for family farms.

According to Caijing, many farmers in Henan already are already in debt, can't get credit, and are balking at the high prices for piglets. Meanwhile, big companies like Wens, Muyuan, and Zhengbang are getting infusions of capital from soaring stock prices and government aid. Individual farmers generally can't get bank loans, and persisting disease risks make them cautious about restocking their farms.

Pig-farming has been a path out of poverty for many rural families in densely-populated Henan where per-person land allotments are less than 1 mu--the size of a garden plot. Few young people are left in the villages to help with farm work.

Hog prices have been coming down recently but they are still at near-record levels. The Beijing Xinfadi wholesale market attributes a modest drop in prices last month to a rebound in production in the northeastern provinces, removal of village road blockades, and resumption of slaughterhouse operations after the waning of COVID-19. However, the Beijing wholesale market received an average of just 971 carcasses weekly during March 2020--47 percent less than a year ago and by far the lowest total in recent years. Xinfadi says pork demand is weak due to a seasonal lull in the spring and closure of many restaurants and cafeterias, which the market's commentary identifies as an opportunity to build up swine inventories.

Another trader named Yang told Caijing that in past years 90 percent of the calls he got were from farmers wanting to sell pigs; now it's reversed and everyone is looking for pigs to buy. They don't care about the size or leanness--just whether you have anything to sell. Mr. Yang was on the phone with a buyer in Zhejiang Province making a deal for 3 truckloads of hogs for 2 million yuan (over $280,000).

The Caijing reporter visited a county in Henan that used to be a major meat-producing area where many farmers quit after waves of crises that include a crackdown on clenbuterol use and the African swine fever epidemic. Along the road multiple swine farms are visible, some idle and some already converted to other uses.

A farmer named Yu hit the jackpot by netting 1.4 million yuan last year--more than he usually makes in 3 years. Last year he lost 50 sows to a respiratory illness. He has only 50 sows left and the high price of piglets and rumors about new disease outbreaks make him hesitant to expand.

Ms. Li got her start raising 6 pigs 20 years ago and had 1000 head last year, but most of her pigs died in January. She still has 30 sows and dozens of piglets, but she doesn't dare restock her farm.

Ms. Li's husband has been sleeping in the courtyard. He is furious that she bought expensive medicated feed to save her sick pigs against his plan to sell them before they died. The carcasses are still lying in the courtyard.

Last year Ms. Li lost 70 sows and 500 finishing hogs to disease after the spring festival holiday. She notified local veterinary officials who sent someone to draw blood from three of the animals, but she never received results of the tests. The insurance company said they could only pay a small amount because they were "abnormal deaths." She didn't get any culling subsidy from the government either.

Last August she complained to the local government about the culling subsidy. Local officials made a deal with the insurance company to compensate her for about half the sows that died. Later the local government gave her 100,000 yuan as aid for restocking her farm. When she complained again they gave her some more cash.

Farmer Qi in northern Henan told Caijing he used to sell 20,000 pigs a year, but he lost about half his herd in 2018. He would like to restock his farm, but has never gotten any compensation for his lost pigs. He needs the cash to buy new pigs at 6000 yuan per head--three times what he used to pay.

Farmers complain that subsidies for rebuilding China's swine industry are tilted toward big companies. An aid program announced by the agriculture ministry in September 2019 focused on aiding breeding farms and large-scale farms. Last October Henan Province announced that farms with 10,000 to 50,000 head would be eligible for pig farm aid. Farmer Qi got someone to help him with the application but he failed to get any aid.

Farmer Qi finances his pig farm with loans from friends and family. Local banks don't accept pigs or farm buildings or equipment as collateral. Farmers can only mortgage their houses to get loans.

Farmer Wang told Caijing he got calls from local bankers after they had a meeting with local officials about ramping up loans to pig farmers last November. At first, they talked about accepting farm assets as collateral, but soon "the pendulum swung back" and banks were again looking mainly at houses as collateral, Wang said.

Quite a few farmers are already in debt. Farmer Wang also used to be an agent for a feed company, and 30 of his former customers have past-due debts for feed they couldn't pay due to low pig prices and disease in 2018. A collection agency told him to pressure the farmers to pay, but he refused because he knows the pressure pig farmers are under. Feed sales dropped off last year when disease killed off most of the local pigs and he quit the feed business.

Last month the Ministry of Agriculture announced that the threshold for applying for subsidized loans was reduced from 5000 head to 500. Banks were advised to start accepting live pigs, land operation rights, and hog farm machinery as loan collateral.

Cash-rich companies welcome the opportunity to expand and gain market share. Soaring stock valuations and government aid give them cash that family farmers lack. In December, Henan and Hubei Provinces announced Muyuan and its subsidiaries would get 73 million yuan (over $10 million) in loan interest subsidies.

Last month Dekang Group flew in 500 breeding pigs from France to populate a breeding center the company has been building in Guizhou Province over the past 15 months. These purebred animals purchased from a leading breeder in Europe cost 40,000 yuan each. They will form the nucleus herd whose descendants several generations and more than a year from now will become commercial hogs for slaughter. No family farmers can make this kind of investment in time and money.

One securities firm expects the top 10 hog-producing companies to gain 40-50 percent of the market in 3-to-5 years, up from about 10 percent before the ASF epidemic.

No comments: