Expansion Fails to Bring Down China's Hog Price

Another surge this month leaves China's hog price at about the same as the record-highs posted a year ago--despite the Ministry of Agriculture's claim that the country's swine inventory has rebounded faster than expected and is now at 90 percent of normal. 

The average hog price reported by China's National Bureau of Statistics for mid-December 2020 was 33.9 yuan per kg., just slightly below the average of 34.2 yuan/kg the Bureau reported for the same time period in 2019. Soozhu.com reports a further increase in the hog price to 35.40 yuan/kg on December 30, 2020. Prices were about 10-to-15 yuan/kg. before the surge in prices in mid-2019.

Data from National Bureau of Statistics average purchase prices for industrial materials.

The Ministry of Agriculture and Rural Affairs reports a similar pattern in pork prices. The average wholesale price of a swine carcass averaged 49.82 yuan/kg in mid-December 2020, slightly lower than the 50.99 yuan/kg reported a year earlier. The price is still more than double the "normal" price, despite the Ministry's claim that the herd is just 10 percent below its "normal" size.

Data from China Ministry of Agriculture and Rural Affairs average wholesale market livestock prices.

High prices and thick profits are attracting new entrants and expansion. The profit from a slaughtered hog is said to be equal to two bottles of luxury Maotai liquor (but a Soozhu.com commentary calculates that it falls at least 1000 yuan short), and it's hard to not succeed with such high prices.  Most industry commentators warn of declining hog prices in 2021 and possible excess capacity.

Rising production costs could mean that China's pork prices get stuck at a permanently high level. An October industry commentary wondered how long the good times would last, with declining hog prices and rising corn prices squeezing hog farm margins (hog prices were falling in October). A December 23 commentary warned pig farms that cost control would be key for 2021 as the industry slides into the downward phase of its "super cycle," and poorly managed farms with high costs could get hammered.

Rapid expansion pushes up the cost of scarce raw materials. A December 16 Soozhu.com commentary noted that feed companies announced the latest in a series of price increases this month. Ag Ministry data shows that the current price of pig feed exceeds the record-high in 2014. The average corn price is also near its record-high posted the same year. Rising feed prices, of course, translate to rising costs for pig and chicken farmers, shrinking profits and restraining  growth. Rising costs are especially problematic for poultry farmers because their prices crashed a year ago.

Ministry of Agriculture and Rural Affairs reports of average wholesale prices.

Mega-farms entering the industry may enjoy scale economies, but they also have higher fixed costs for facilities and must pay high wages to attract laborers. Wens Company, one of the top two swine producers, warned investors that the cost of producing feeder pigs is higher this year due to the amortized cost of building "efficient" farms and increased labor costs. Soozhu.com noted that the African swine fever virus has forced farms to adopt stricter biosecurity measures and pay for senior-level workers--definitely "good things"--but these are also costly things. 

Commentaries warn about falling hog prices next year,
following this year's aggressive expansion

The rapid hog expansion has also degraded the quality of the herd. Short of breeding stock, farmers often retained gilts intended for commercial herds to use as breeding sows, reducing productivity and sometimes introducing disease to sow barns. While there is not much chatter about African swine fever now, other diseases like hog cholera and pseudorabies are reportedly widespread this year.

The price of feeder pigs has come down about 20 percent from August highs, but piglets remain expensive. The price of a feeder pig is still 2.8 times the price of a finished hog, well above the recent "normal" ratio of 2:1. This ratio appears to be ratcheting higher over time as costs balloon in that segment of the production chain. This means piglets are a bigger share of the final cost of a hog. The rising cost of feeder pigs is another signal that industrial-type sow farms are costly to operate and hard to build. The October commentary recommended that farms adopt a farrow-to-finish production model to avoid costs of purchasing piglets through intermediaries. 

Calculated from China Ministry of Agriculture and Rural Affairs wholesale price data.

A feedtrade.com commentary noted that profit margins in the slaughter component of the sector have shrunk as hog prices soared. The gross margin from slaughtering hogs plunged from nearly 82 yuan/head in 2018 to 42 yuan/head in 2019 and was near zero by October 2019. The average margin for 2020 was reported to be 14.24 yuan/head, the lowest in the last three years. Slaughterhouses had to pay more for hogs, and consumers cut back on pork purchases as prices soared. In parts of northern China during the first half of 2020, the slaughter volume was down 30-to-50 percent from a year earlier. Some big companies had very high costs for labor and utilities that pushed margins into negative territory.

The industry may have to learn how to live with imported pork. The slaughter commentary noted that margins and shipment volume for slaughter enterprises are restrained by pressure from "frozen meat"--code for imports. China's pork reserve auctioned a total of 50,000 metric tons of frozen imported pork on December 24 and 28. 

Sichuan Province--traditionally China's largest pork producer--now has a pork supply deficit and relatively high prices and slaughter margins. Selling pork to Sichuan was once like "shipping coal to Newcastle." Now, according to the commentary, carcasses produced in Sichuan are sold locally at high prices, while low-priced cuts are shipped into the province to fill the deficit. 

China's Corn Imports Exceed TRQ for First Time

China has imported 9 million metric tons (mmt) of corn in the first 11 months of 2020, China's largest-ever corn import total. The corn import total exceeded the country's 7.2-mmt tariff rate quota (TRQ) for the first time as of October after falling short of the quota every year since it was established in 2001. An additional 1.23 mmt imported during November pushed the 2020 total even further beyond the quota. 

Source: China customs statistics.

China's January-November 2020 imports of corn from the United States totaled 3.285 mmt, a more than 10-fold increase from the 2019 total and the largest total since 2013. While efforts to meet purchase commitments from the U.S. in the Phase One agreement are one factor behind the surge, Ukraine remains the top supplier of China's imported corn in 2020 with over 5.2 mmt. Imports from Ukraine also increased this year. Other countries--including Bulgaria, Russia, Laos, and Myanmar--supplied 531,000 mt of corn through November, up nearly 200,000 mt from the 2019 total. 

The surge in corn imports appears less dramatic when considered in context of China's overall feed imports. China's imports of corn, sorghum, barley, DDGS, and cassava combined totaled 23.6 mmt in Jan-Nov 2020. That total is up 9 mmt from 2019, but about "normal" in historical context. Combined corn-sorghum-barley-DDGS-cassava imports peaked at over 42 mmt during 2015 when Chinese feed mills were eager to find substitutes for pricey domestic corn. The non-corn feed imports deflated in 2016 and subsequent years with the end of the corn price support, anti-dumping/countervailing duties on U.S. DDGS and sorghum, a new set of duties imposed during the trade war, and AD/CV duties on Australian barley this year. In 2020, sorghum imports bounced back after retaliatory duties were lifted, but imports of DDGS remain minimal.  

2020 is the first year after a WTO panel issued a 2019 report of written submissions and oral arguments in the U.S. challenge of China's tariff rate quota administration for grains. There was optimism in some circles that reforms of the quota system would boost imports by making more of the quota available to private-sector importers. However, some clues indicate that the government still dominates corn imports this year and the surge in 2020 imports may reflect a plan to refill reserves with cheap imported grain.

China still doesn't reveal which companies receive import quota and public statistics do not reveal which companies import grain. However, corn import statistics tabulated by the province where importers are registered give us a clue about the dominant role of COFCO. Customs data show that companies headquartered in Beijing accounted for nearly all the surge in 2020 corn imports. As of October (these data have not been released for November), 52 percent of this year's corn had been imported by Beijing-registered companies. COFCO almost certainly accounted for nearly all of these imports since most big Chinese agribusiness companies are headquartered outside Beijing. The increase in corn imports this year by companies based in Shandong and Fujian Provinces was unremarkable. Corn imports by Guangdong-based companies went down this year. 

There was a signal earlier this year that the surge in corn imports reflects a program to refill government reserves with imported corn. On April 22, 2020, a "rumor" spread that Chinese authorities were considering a plan to restock commodity reserves with "10 mmt of soybeans, 20 mmt of corn, and some cotton, sugar and vegetable oil." The plan was said to be motivated to calm markets during the pandemic, take advantage of low international prices, and to meet Phase One agreement commitments to purchase U.S. commodities. China Grain Net described the reserve restocking plan as a "rumor" that needed to be confirmed by the government, but no confirmation was ever given. Yet the surge in imports of corn, wheat, and cotton this year and the predominance of Beijing-based companies appear to be consistent with the plan.

It is unclear how corn imports exceeded the quota. The margin between Chinese and international prices is not wide enough to justify imports at the out-of-quota 65-percent tariff. There is speculation that the government subsidizes grain imported for reserves or exempts reserve grain from tariffs, but that has never been announced publicly. The 2019 WTO panel report on China's TRQ dispute revealed that China has a history of managing the TRQ in an opaque, arbitrary manner, and this may be more of the same. Chinese officials have announced that the TRQ will again be set at 7.2 mmt in 2021 despite reports of purchase commitments for U.S. corn that exceed this amount. 

The 40-percent increase in China's corn futures prices since the beginning of 2020 has been concentrated in the northern part of the country. Guangdong Province--one of the two largest feed-milling provinces--has backed off from purchasing domestic corn from northeastern provinces, instead stepping up imports of sorghum and barley (perhaps also feed wheat). Consequently, corn inventories at northeastern Chinese ports have built up to record levels.

In contrast to corn, customs data show sorghum is imported primarily by companies in southern provinces: Guangdong, Fujian, and Shanghai. Beijing companies imported minimal amounts of sorghum in 2020. Almost nobody imported sorghum during 2019 at the peak of the trade war (and at the nadir of swine losses to the African swine fever virus). Sorghum imports have bounced back in 2020, but they are still relatively low. Thus, the larger corn imports are to some extent offset by low imports of sorghum and other feeds restrained by other duties. 

*2020 data through October.

China's corn prices have some room to rise further in 2021 and corn imports could reach 20-to-30 mmt, according to futures analysts interviewed by China's Futures Daily last week. However, there are a number of uncertain factors that could affect the corn market and agricultural markets more broadly, including the potential for a global food price increase in a post-covid era, possible warming of U.S.-China relations, expansion of corn production in China next year, and impacts of weather on corn production. 

Leadership Change at China's Ag Ministry

addendum: Tang Renjian was appointed Minister of Agriculture December 26, 2020.

China's Minister of Agriculture mostly disappeared from the Ministry's web site at the end of November. While Han Changfu remains Minister of Agriculture for the time being, his more important position of communist party secretary has been handed over to Tang Renjian in a minor shake-up of personnel in Beijing. 

A one-sentence posting on the Ministry's web site said as of December 1 the communist party central committee had decided that Comrade Tang Renjian serves as member and office director of the Central Rural Work Committee and Party secretary of the Ministry of Agriculture and Rural Affairs, and that Comrade Han Changfu no longer serves in those positions. 

In: Tang Renjian

Out: Han Chanfu

During the last 3 weeks Han Changfu no longer appeared in any news stories on the ag ministry web site, nor did he appear for meetings with visiting dignitaries. The site still lists him as Minister, however. Tang Renjian was featured only in two sessions where he instructed the Ministry's party organization on priorities in rural work and on an inspection tour in Hubei Province. On each occasion Tang urged listeners to study the remarks of Xi Jinping on rural policy.

Tang Renjian, 58 years old and a native of Chongqing, was most recently governor of Gansu Province since 2017. He now replaces the 66-year-old Han Changfu who has served as Minister of Agriculture since 2009 and was head of the central rural work group for the last 2 years. 

Tang graduated from the Southwest University of Finance and Economics in 1983 and rose through the ranks of the Sichuan government. Tang reportedly studied for a doctorate in economics while he was employed and held the title of "senior economist." He is an adjunct professor at Southwest University of Finance and Economics and at China Agricultural University. 

His big break came in a 1998 posting to the Office of the Leading Group for Financial and Economic Affairs, where he became supervisor. He held top posts in the Guangxi provincial communist party before returning to the Office of the Leading Group for Financial and Economic Affairs as Deputy Director in 2016 where he succeeded Chen Xiwen in directing rural policy work. Tang has reportedly been a key assistant to two powerful men in Xi Jinping's orbit: Liu He and Wang Yang. 

Tang has been involved in a number of rural policy and poverty alleviation working groups, including the drafting of the 2004 "Document No. 1" that launched China's first program of rural subsidies and cancellation of agricultural taxes. His work has included "Respond to the Challenge of Entering WTO with the Strategy of Unbalanced Competition," "Developing 'Company Agriculture' and Agricultural Companies," "Nurturing Rural Informal Financial Organizations," and "Establishing Agriculture's Tax-Free Era." 

Another rural policy wonk, 57-year-old Han Jun, has also been transferred from his posts as vice minister of agriculture and deputy party secretary where he had served since 2018. Han Jun is now deputy governor and acting governor of Jilin province.

China Obsessed with Looking for Covid on Imported Food Shipments

Chinese officials eager to shift blame for covid-19 have reported finding traces of the virus on a handful of imported frozen meat and seafood boxes out of thousands tested after a massive testing campaign was ordered. A box of chicken legs appears to be the only domestic product that has been tested--and it came from a multinational company operating in China. Inactive virus was found on the outside of boxes; none of the food inside the boxes tested positive.

Chinese official disinfects U.S. pork boxes that tested positive for covid-19.
The meat itself did not test positive.

On November 25, Chinese food safety officials announced that covid-19 virus had been detected on the packaging of dozens of shipments of imported frozen food in a number of localities. The deputy director of the national food safety risk assessment center attributed the surge in positive test results to the increase in number of tests performed, and warned consumers not to panic because positive results were found on only 4.8 per 100,000 samples. Virus was found only on packaging, not in the food itself. The official explained that traces of the virus DNA can remain on surfaces after disinfection inactivates the virus. 

In each instance, hundreds of follow-up tests of workers, storage facilities, containers, and processing equipment were all negative. On November 24, China's State Council ordered an "Imported food cold chain comprehensive disinfection work program" that requires imported frozen food to be held separately at ports, tested, and disinfected, before being released to the domestic market.

Most positive tests of imported meat and seafood reported in Chinese news media in mid-late November and December appear to have been found in cold storage warehouses in ports such as Dalian, Tianjin, and Yingkou, and in second- or third-tier cities. None have been reported in tier-1 cities Beijing, Shanghai, or Guangzhou. 

Disinfecting a food market in Zhejiang Province.

In Shanghai--the largest entry point for imported meat and seafood--officials announced in November that they had found no positive covid results in tests of 130,000 samples of imported food and 2,432 samples taken from trucks, containers, and cold-storage warehouses in the imported food cold chain.

News reports say that several packages of Argentine beef that had the virus detected at inland warehouses entered China through the Shanghai port: 

• One shipment in Jingzhou City of Hubei Province tested positive a month after it had arrived in China. The shipment was produced in Argentina during August-September, reached the Shanghai port October 28, was shipped to Zhengzhou in Henan Province October 30, and reached a warehouse in Jingzhou City in Hubei Province November 15, before virus was discovered on packaging December 2.
• Another Argentine beef package tested positive on December 20 in a Huzhou, Zhejiang Province market more than a month after it entered through the Shanghai port on November 12 (130 other samples and 40 workers in this market all tested negative).
• A frozen beef package from Argentina that tested positive in Chongqing December 15 also came from Shanghai.
• A 27-tonne shipment of Brazilian beef in Wuhan that tested positive November 12 had arrived at the Qingdao port August 7 and had been in the warehouse in Wuhan since August 17.

On December 15, the first instance of a positive covid-19 test result for domestic food packaging was reported by a supermarket in Wuxi, Jiangsu Province. "Third party testing" discovered the virus on packaging of one of three shipments of chicken legs produced by a factory in Anhui Province. It is unclear why these chicken legs were being tested since there are no other indications that domestic food products are being tested. The chicken legs just happened to be supplied by a wholly-owned subsidiary of a prominent American company. The company supplies chickens from its own farms for the processing plant, stores them in its own facility, and ships them in its own trucks. No positive results were discovered in over 2,700 other samples taken from workers, factory surfaces, trucks and warehouses. Anhui Provincial officials insisted that the packaging could not have been infected in their province. 

November-December Detections of Covid-19 virus on imported frozen food in China
Date		Province	City/county	Origin	Food
Nov	12	Hubei	Wuhan	Brazil	beef
	12	Shandong	Liangshan	ns	beef
	12	Fujian	Quanzhou	ns	frozen food
	13	Henan	Zhengzhou	Argentina	beef
	13	Gansu	Lanzhou	ns	shrimp
	13	Shandong	Jinan	Argentina	beef
	14	Shandong	Sishui	ns	fish/shellfish
	15	Shaanxi	Xi'an	Argentina	pork
	21	Guangdong	Dongguan	Argentina	chicken wings
	28	Liaoning	Dalian	Russia	cod fish
Dec	2	Hubei	Jingzhou	Argentina	beef
	4	Liaoning	Yingkou	Argentina	beef
	7	Zhejiang	Ningbo	Brazil	beef
	13	Tianjin	Binhai	Argentina	pork
	15	Jiangsu	Taizhou	USA	pig ears
	15	Jiangsu	Taizhou	China	chicken legs
	15	Chongqing	Gaoxin	Argentina	beef
	20	Zhejiang	Huzhou	Argentina	beef
	21	Liaoning	Anshan	Brazil	beef
Source: compilation of Chinese news reports.

Chinese officials have been accusing imported frozen food of bringing covid-19 into China ever since a June outbreak in Beijing that was traced to a cutting board where Norwegian salmon had been sliced. No positive samples were found in nationwide testing of markets and warehouses in mid-June that was launched the day after the discovery of covid in the Beijing market. News stories of testing in June featured several of the same markets where this month's positive tests were announced: Jingzhou, Wuhan, Chongqing, Xi'an, Ningbo and Tianjin. Earlier in November, authorities manufactured another scare linked to German pork and fish from India--also found on packaging but not in the products. China has  rejected dozens of shipments of shrimp from Ecuador for months, claiming that containers and packaging contained traces of covid-19 virus.

The New York Times noticed that China's leadership is putting great effort into creating a narrative that the virus originated outside China. There is little doubt that the excessive crackdown on imported frozen food is meant to focus attention on foreign countries as the source of the virus.

The campaign against imported frozen food doesn't seem to be meant as a trade barrier. Beijing Daily quoted an official from China's logistics and procurement federation who said that large amounts of imported frozen food are needed to fill gaps in domestic supply, a view he described as "consensus."

Ironically, the surge of frozen meat and seafood imports blamed for importing the covid-19 virus is the result of abysmal failure in controlling the African swine fever virus in 2019. The virus swept through the entire country within months, killing off at least 40 percent of the country's swine and creating the biggest meat shortage in history in 2020.

Veterinarian dishes on China's hog recovery

A "Real P3" podcast featuring American veterinarian Wayne Johnson provides a rare glimpse of what’s happening on the ground as China’s swine industry recovers from its African swine fever (ASF) epidemic. Dr. Johnson offers a unique perspective, having worked in China for 16 of the last 24 years in training, consulting, and running a diagnostic lab. 

Last year, the ASF outbreak closed many pig farms and this year's “novel coronavirus” or “covid-19” prevents farm visits, but the doctor keeps his finger on the pulse of the industry through constant lab testing of samples submitted by customers, consulting and training.

Dr. Johnson observes that many Chinese pig farmers have shortcomings in their understanding of good nutrition, proper ventilation, and the exercise of “discipline.” They learn by doing, and farmers now understand biosecurity a lot better than they did. "ASF will teach you biosecurity in a hurry,” Dr. Johnson explains.

China hasn’t dealt with ASF “straight-up.” There’s a “great deal of posturing about it.”

China is dealing with diseases of both the past and present. Older diseases like classical swine fever and pseudorabies have eclipsed ASF as the main problems. Other problematic bugs are PED, 4 or 5 strains of PRRS, and diarrhea from e coli. 

ASF wiped out about half of China’s sows. This year farms have been breeding “anything that’s female” to restock their herds. Some gilts were rushed into the breeding program, bred too young without proper acclimation. Gilts brought pseudorabies from finishing barns into farrowing houses.

Some producers in China developed what they call “ASF-resistant” pigs. They are animals that have learned to tolerate the virus and they actually function as carriers. 

China is importing a lot of pork. Imports have been evident in the supermarket. Pork is imported and dumped into the market through a “bottomless" pork reserve. It’s bad PR to acknowledge that you’re importing so much. China shut down imports of German pork after ASF infected some wild boars, and now imports come mainly from the United States. 

China’s market has been volatile. With hog prices fluctuating around $2.40 per lb.—about five times the U.S. price—"it’s hard to do enough wrong to not make money." 

The doctor saw a commercial feed product last year that contained 5 antibiotics, none of them at the proper level. This year, China banned antibiotics in feed. Instead, farmers are putting the antibiotics in the water. 

The doctor warns that nutrition, care of animals, and various kinds of antibiotics are all part of successful management. Pigs are like machines, in a way. If you treat your machine well, it will treat you well, Dr. Johnson explained. 

China Tries to Talk Down Corn Prices

Chinese officials attribute record-high corn prices to speculation and hoarding. For months they have been warning about impending collapse in prices and doom for speculators, but prices just don't come down.

The average corn price reported by the National Bureau of Statistics peaked in August, but resumed its climb in September-October despite the arrival of newly-harvested corn. The price appeared to level off in November, but the latest data point for late November bumped upward again. The late November corn price is up 34 percent from a year earlier. 

Source: China National Bureau of Statistics raw materials purchase price.

Preliminary estimates of grain output released by the Bureau today showed a tiny 100,000-ton decrease in corn output to 260.67 million metric tons in 2020. Some industry observers expected a larger decline due to multiple typhoons that hit northeastern China in the summer and fall, but agricultural officials insist that losses were minimal as experts helped farmers recover the corn from stalks flattened by storms. The Agriculture Ministry's S&D reports in November and December estimated a 4-mmt increase in 2020 corn production to 264.7 mmt. 

National Grain and Oils Information Center's November report blamed the typhoons for setting off speculation in the futures market, but claimed the damage was not that great and was offset by big harvests outside the storm-hit northeastern provinces. NGOIC expected a slight increase in 2020 corn output.

One recent article warned traders and farmers not to "blindly pursue higher corn prices" because a Dec. 4 National Grain and Commodity Reserves Administration news conference signaled impending policy pressure to bring corn prices down. The article cautioned market participants about signs that corn traders are about to start dumping their corn-holdings as the peak corn marketing season arrives. The writer said livestock farmers could not tolerate high corn prices for long--apart from hog farmers making modest profits poultry farmers are suffering big losses, and substitution of wheat for corn in feed rations is becoming more widespread.

Sinograin announced plans to suspend purchases of corn for reserves in the northeastern region. An auction of 576,574 metric tons of corn held in reserves since 2015 has been scheduled for December 11--such auctions are usually not held during the peak corn marketing season. 

Other news also appears calculated to tamp down expectations of corn shortages. Ukraine reportedly exported 1.3 mmt of corn to China in November. A "rumor" says that COFCO plans to buy 1 mmt of Brazilian corn. 

The increase in corn prices is not as strong in southern China where imported corn and other feed ingredients keep a lid on prices. Thus, the price differential between south and north is unusually narrow and stocks have built up at northern ports.

An article yesterday on Agricultural Futures Net insisted that a decline in corn price is nothing to be afraid of. The cost of holding record-high commercial corn stocks is high, the usual interregional corn price relationships are distorted, and demand is going to weaken next year. A decline in corn price is not a bad thing, the article insisted, because substitution of wheat and rice for corn, imports, and pressure from costs of holding inventory pose a risk for those holding high-priced corn inventories.