Tuesday, December 29, 2020

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. 

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