Monday, May 31, 2021

Chinese Swine Farms: "Transformation" and Higher Costs

Big Chinese swine companies are transforming the industry by replacing rudimentary "backyard" brick piggeries with huge automated barns, but the hefty overhead costs of the new farms are also boosting hog production costs. Consequently, falling hog prices are hitting their breakeven level faster than expected. That could put a brake on the industry's expansion and create a permanent opportunity for imported pork in China's market.

On May 17, an official from China's livestock and veterinary bureau claimed the country's swine inventory has almost fully recovered from its dramatic shrinkage during the 2018-19 African swine fever (ASF) epidemic. But he also warned that the steady drop in hog prices this year has put Chinese farmers perilously close to financial losses.

The cadre of swine companies--despite being privately owned--delight Chinese officials who love big things they can subsidize and manipulate. On May 19, Vice Minister of Agriculture Ma Youxiang met with 14 big swine-farming companies where he celebrated the swine industry's rapid recovery from the ASF epidemic. Ma exhorted swine-farming companies to lead the pig recovery and to assist small and medium farmers. Vice Minister Ma also warned companies to strengthen industry "self-discipline" and to resist temptation to violate laws and regulations, suggesting distrust of these industry "dragon heads." Ma ordered local officials not to let up on their work to promote recovery of pork supplies and to prevent spread of ASF. 

Vice Minister Ma acknowledged that African swine fever is still a "very big risk"--a subtle change from regular assurances over the past year that ASF was under control. Ma also warned of rapidly falling profits for farmers and an erosion of sow productivity. 

A field trip to Guangdong and Guangxi Provinces published in early May found that the industry there had recovered to 60-70 percent of its pre-ASF inventory--a lot of progress but less than the Ag Ministry's optimistic assessment. Three of the big swine companies reported that they contract with thousands of independent farmers to fatten hogs for a fixed payment. Reports on disease were mixed. Some companies reported few problems, while others reported pockets of serious outbreaks during the winter months. In Guangxi Province around the Fangcheng port, 70-80 percent of farms had been infected by ASF. One company said infections had been as high as 40-50 percent during the winter in Shandong and Henan Provinces. Disease problems included ASF transmitted by illegal vaccines, PED, FMD, and PRRS.

Veterinary Bureau "Inspector" Xin Guochang credited an increase in "above scale" farms for "upgrading" the industry. The Guangdong-Guangxi field trip report confirmed the rapid expansion of the swine-farming companies. Three companies had a combined 75,000 sows in the region. One company said it had doubled its sow inventory from 20,000 to 40,000 since last fall and accounts for 40 percent of Guangdong's slaughtered hogs. The field trip report said that smaller backyard farms had exited in large numbers since the ASF epidemic. One company said the number of contractor farms had been cut in half. In one area, the number of slaughterhouses had also been cut in half. The companies planned further expansion by the end of 2021.

A March 2021 social media discussion about whether you can earn more money raising pigs than as a migrant worker advised readers that breeding sows and producing piglets is a high-input, high return and high risk segment that requires a lot of technical know-how and investment. This is the segment the big companies specialize in. In contrast, fattening weaned pigs to market weight, either as a contractor or an independently operated farm, requires mainly physical labor--feeding, cleaning and shoveling manure--during the 5.5-month production cycle. The writer advised those who have the know-how to consider working for a company on salary if you don't mind being cooped up on a farm for a month at a time. Other posts noted that small hog farms don't make much money, don't qualify for subsidies, and are gradually disappearing. 

Inspector Xin of the veterinary bureau said China now has enough sows to produce 690 million fattened hogs. The rapid expansion has been achieved by holding back female pigs meant for the commercial herd to breed as sows. The field trip study team was told these "third generation" sows produce 10 pigs per litter versus 14-15 per litter for sows from the breeding herd. Xin claims that farms are culling these  low-productivity sows and replacing them with more productive sows. Companies visited on the Guangdong-Guangxi field trip, however, said 70 percent of sows held by big companies in Guangxi were commercial "third generation" gilts and the proportion was 60 percent in Guangdong. One slaughterhouse said 70 percent of pigs it processes are males because so many females are being retained to be bred as sows. 

High hog prices have prompted larger-than-usual slaughter weights. The average in Guangdong-Guangxi was reported to be 130-140 kg, up from 115 kg before ASF. Especially huge hogs of 150 kg are produced by a practice of "second-time fattening": farmers acquire hogs already at their usual slaughter weight and fatten them to even larger weights. At these heavy weights, feed conversion diminishes and buyers discount the price for high fat, but high hog prices made the practice feasible. One company contacted by the field trip said the practice was uncommon in their area, but another reported that 40 percent of hogs were "second-time fattened" in its area. 

One company reported an overlooked effect on sow productivity: sow conception rates were low this year due to disappearance of staff members during and after the February Lunar New Year holiday. One  post in the social media discussion of pig farm profits observed that most employees on company-operated farms are elderly "aunties and uncles" with little education or training. Other respondents said company-operated pig farms pay good salaries of 7,000-10,000 yuan per month and are offering enticements like on-farm karaoke, billiard tables, basketball courts, and free room and board to attract workers. Another propaganda meme features university graduates who took up pig farming.

Inspector Xin said there are signs that farms are losing money as recent hog prices of 18-19 yuan per kg approach the breakeven price for farms of about 17 yuan per kg. The breakeven price is 4.5-yuan higher than before ASF, Xin said, due to rising costs. The biggest Guangdong company told the field trip team its cost is 16-18 yuan per kg, while another company said its cost was 15.4 yuan. Costs for disease prevention are up. 

A Caijing article last week reported on the decline in hog prices to breakeven and noted that most pig-farming companies had reported weaker profitability for the first quarter of 2021. Caijing quoted a securities analyst who attributed the weaker performance to ASF outbreaks, rapid turnover of sows, and generally higher costs. A Chinese Academy of Agricultural Sciences expert told Caijing China's hog production costs are 17 yuan/kg versus 12 yuan/kg in foreign countries--a 40 percent difference. 

China's breakeven hog price of 17 yuan per kg should put a floor under Chinese hog and pork prices. If prices fall below the breakeven level, farms will come under financial pressure and cut back on production or quit the industry. This may restrain further expansion of the swine herd.

The breakeven price is roughly equivalent to a pork price of 27 yuan per kg (historically, China's wholesale pork price has been about 60-70 percent higher than hog prices). That's higher than Chinese wholesale prices that prevailed in 2019. The breakeven level is also 45 percent higher than the average C&F value of imported Spanish pork in April 2021 and 89 percent higher than the C&F value of imported U.S. pork. Thus, with a high cost structure Chinese swine farms will become unprofitable well before the price drops to be competitive with imported meat.

Sources: China Ministry of Agriculture and Rural Affairs; production cost reported by MARA;
import unit values from Chinese  customs data.

The Guangdong-Guangxi field trip report noted efficient feed conversion ratios of 2.5-2.8 for large companies (lower than the historical average of 3.1) and survival rates for piglets of 94-95 percent. However, the swine industry expert told Caijing that 40 percent of production costs are now in the production of sows and piglets. The Caijing article hammered on China's weakness in animal breeding and its lack of feed resources as chokepoints for the swine industry. 

A reflection of the changing cost structure is the Ag Ministry's announcement that analysts will phase out the hog-to-corn price ratio as the measure of farm profitability. Costs of feeder pigs, labor, manure management, facilities construction, and disease prevention have increased. The Ministry noted that manure management and disease prevention alone account for 150 yuan per head in cost. The Ag Ministry explained that the grain-hog price ratio was a good profitability measures in the past when hog farmers had no depreciation or interest expenses, used no hired labor, and spent minimal amounts on disease prevention.

The Ag Ministry says it is exploring intervention policies to stabilize the hog supply. In other words, they are looking at new subsidies to correct the problems of oversupply and entry of not-ready-for-primetime companies caused by the first round of subsidies launched in 2019. Watch for discovery of a swine disease in Europe or the United States, discovery of contaminated imported meat, an antidumping investigation, or new standards to clamp down on imported pork if prices keep falling.

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