Prices Crash With Chinese Swine Rebound

Chinese hog prices have now fallen to their level of two years ago. After about 14 months at stubbornly high levels, pork prices are down more than half from their year-ago level, and officials are scrambling to mop up excess supplies. Officials worry that losses will lead to more gyrations in supply.

Average wholesale prices reported by China Ministry of Agriculture and Rural Affairs.

The swine inventory at the end of Q2 2021 was at its highest level in the last five years, according to data released by China's National Bureau of Statistics. 

Calculated from China National Bureau of Statistics reports.

The increase in the swine inventory during Q2 is remarkable given that the statistics bureau also reported a surge in hog slaughter during Q2--usually the off-season for hog slaughter in China. The surge of slaughter is consistent with monthly slaughter data reported by the Ministry of Agriculture and Rural Affairs which indicated 22 million head were slaughtered at "above-scale" plants in June--an unusually large number for the summer months. 

Data from China National Bureau of Statistics.

Ministry of Agriculture and Rural Affairs.

Analysts say the downward tumble in hog prices and aggressive slaughter in recent months reinforced one another. High prices in early 2021 encouraged farmers to stock up on hogs, with many even buying up mature hogs and fattening them to even larger weights. As prices began to dive after the February holiday, farmers began to panic and sell off animals. The panic-selling of excessively fat hogs peaked in June, with prices dipping briefly under 14 yuan per kg. before mysteriously bouncing back literally overnight.

Back in August 2019, Vice Premier Hu Chunhua ordered local officials to make restoration of pork supplies an important "political task," ordered officials to conduct secret surveys and ordered news media to guide public opinion. Ministry of Agriculture inventory numbers stopped after October 2019, and have only been intermittently reported in news conferences to show the recovery was going "faster than expected." 

Quarterly sow inventories reported by China's National Bureau of Statistics since 2020 indicate steady recovery. The number of sows grew 10 million from June 2020 to June 2021. The current inventory exceeds the sow inventory reported at the end of 2017.

Ministry of Ag inventories calculated from percent changes--not reported after Oct 2019.
Others gathered from National Bureau of Statistics reports.

The rebound in pork supply seems to be real, but the arithmetic of the recovery implies magical productivity growth in sows. According to the National Bureau of Statistics, China had 36 million sows in June 2020. According to the Bureau, those sows produced enough pigs to slaughter 613 million head AND expand the inventory to by 100 million head over the past year. 

That's a total of 713 million head produced from 36 million sows, equal to nearly 20 surviving pigs per sow, or 2 litters of 10 surviving piglets in a year. As this blog pointed out three months ago, China's pre-ASF sow productivity was about 16 pigs per sow. China's 20 pigs per sow during 2020-21 is a 25-percent increase in productivity and nearly matches U.S. sow productivity over the same period. 

A recent analysis showed that U.S. pigs per litter have increased at a rate of about 1 pig per 10 years. If we assume 2 litters per year, China's productivity improvement in one year equals 20 years of progress in the U.S. 

Such a surge in productivity is implausible. It's true China now has many technically proficient farms able to achieve high productivity. But the ag ministry says 43 percent of hogs are raised by farms producing less than 500 head. The lack of breeding stock, continued disease pressure, and cold weather were not favorable for raising productivity during the last 12 months. We know Chinese swine farms--even the large companies--have been using low-productivity sows meant for the fattening herd to speed up the recovery. Last month a veterinary official acknowledged that farmers had been using low-productivity sows, and urged farmers to cull them as a cost-cutting measure. Last week, speaking at a Ministry of Agriculture news conference the same official acknowledged that piglet survival rates had been low during the winter months due to extremely cold weather.

If Chinese farms had maintained their pre-ASF 16 pigs-per-sow productivity level (a generous assumption), the 36 million sows on hand in June 2020 would have produced 576 million surviving pigs over the past 12 months. If enough pigs were held back to boost the inventory by 100 million head--as the statistics bureau reports--only 476 million would have been available for slaughter. They could not have produced 613 million slaughtered hogs at the historic productivity rate.

The recovery of pig numbers seems to be corroborated by feed production data. The China Feed Industry Association reports that swine feed production during January-June 2021 was up 71 percent from the same period in 2020. Scattered reports of pork sales indicate year-on-year increases of 35-40 percent.

Monthly data from China Feed Industry Association.

Exactly how big the rebound in pig production was will remain a mystery. We have learned that growth in the Chinese pork industry is constrained by inelastic consumer demand and rising production costs. The steep drop in pork prices suggests Chinese consumers figured out how to get by on less pork over the last two years of high prices. 

And it's an industry with a rising cost structure. With hog prices about the same as three years ago, swine farmers are incurring deep financial losses. The Ministry of Agriculture and Rural Affairs' swine data portal says "above scale" hog farms were losing 158 yuan per head in May. A June report from Shandong Province said farrow-to-finish farms were losing 340 yuan per head and feeder-to-finish farms were losing 1400 yuan.

Floods, pests, disease, drought pose risks for China's big harvest

Epic flooding, drought, hungry caterpillars, and stubborn African swine fever have Chinese officials scrambling to shore up the fall grain harvest--just two months away.

Torrential rains and catastrophic floods in Henan Province this week are the latest and most-publicized of a series of mid-summer extreme weather events that have affected most of China's major agricultural regions in 2021. 

On July 21, Xi Jinping issued "important directives" to prevent casualties and property damage from the serious flooding in Henan. Noting that rivers are above their normal levels, dams are vulnerable, some trains have been stopped and flights have been canceled, the flood control situation was pronounced to be very severe. Soldiers were ordered to help with rescue and aid, and authorities were instructed to provide ample warning of heavy rain, typhoons, mountain torrents, and mudslides. 

Flooding in Jiangxi Province.

In June, Yicai reported that there was widespread flooding in Inner Mongolia and farms had been flooded when one reservoir breached its banks. Youtube videos show at least two modest-sized reservoirs in Inner Mongolia bursting. Some rivers Heilongjiang in the northeastern part of the country were also flooding, according to Yicai, and there were also concerns about flooding in western and northern parts of the Pearl River basin. Yicai insists there is no reason to worry about abnormal weather happening simultaneously with droughts in the western United States and Brazil because China produced record amounts of grain the last two years.

On July 12--before the Henan storms--China's Ministries of agriculture, water resources, emergency management and weather bureau discussed a 100-day fall harvest action plan for the key July-September months to address:

• summer drought in the northeast 
• Yellow River flooding
• high temperatures and typhoons in the mid- and lower reaches of the Yangtze River
• controlling the spread of fall army worms 
• controlling rice pests

The disaster mitigation program is aimed at achieving the national 650-million-metric-ton grain harvest target. A circular describing the program was released July 20 (the document itself does not seem to be publicly available) calling for each department and local government to take steps to prevent and mitigate disasters as the agricultural sector faces risks from abnormal weather. The program calls for issuing weather reports, early warnings, drilling emergency wells, building drainage facilities, shoring up reservoirs, refining emergency plans, issuing aid and materials, preventing pest and disease outbreaks after floods recede, and assigning technicians and experts to advise particular provinces and districts. 

Henan Province rainfall map, July 19-20, 2021

On July 15-16, Minister of Agriculture Tang Renjian inspected disaster prevention and mitigation work in Shandong Province, another grain producing region hit by horrendous storms June 15-16. Tang sounded the same themes about ensuring a big fall harvest, weather forecasting and pest control. Tang inspected a "high-standard field" project and checked the status of corn stalks. Tang was said to be "very concerned about pest prevention," saw observation lights meant to detect army worms and learned about bug specimen collection.

June flooding in Shandong Province

On July 20--the same day as the storm(?)--the Ministry of Agriculture and Rural Affairs held a meeting of officials from nine provinces to discuss control of fall army worms--ravenous caterpillars--in the Yellow River region. The officials are charged with holding losses of corn in the region to no more than 3 percent this year and preventing the caterpillars from spreading beyond the Great Wall into the main corn-producing regions of the northeastern provinces.

The African Swine Fever (ASF) situation was acknowledged as grim and a "heavy task" at a July 20 Ministry of Ag news conference on the state of the agricultural economy. The official recited the tiny number of ASF outbreaks reported by the Ministry to demonstrate improvement since 2019, but he acknowledged that the virus is established in the country, that contamination is geographically widespread and has been found in each link of the supply chain, and described the virus as "stubborn." He acknowledged that there have been new strains lately with less severe symptoms, and a long incubation period makes the virus difficult to detect. He worried that infections from abroad are a risk due to the country's long border. The official admitted that animal disease prevention and quarantine doesn't operate well--with many grassroots veterinary organizations having unpaid bills--raising the risk of recurrence of the disease. The official warned local officials not to slack off or be careless in animal disease prevention efforts. 

Farmers in Sichuan Province try to rescue corn from flooding last year.

At the July 20 news conference, another official insisted that China had an excellent summer harvest of grain--reversing several years of decline in wheat area and improving the quality wheat area to 37 percent. In response to a question about mold and fungus on wheat due to summer rains, she asserted that only 0.3 percent of the wheat had problems and she suggested the bad wheat could be fed to animals. 

While the wheat in Henan--the biggest wheat-producing province--was already harvested before this week's torrential rains, one might wonder how wheat held in storage might be prevented from molding when most of the province is flooded and humid. 

Feed Booming, China Loosens up on Corn Imports

The latest data indicate China's demand for animal feed has kicked it up a notch this year.  With tight corn supplies, Chinese authorities are loosening the longstanding quota stranglehold on corn imports by allowing imports in "bonded zones" and turning to the international market to restock reserves. 

May 2021 data from China's feed industry association suggest that the country's feed production has vaulted to a new level. China's feed production in the first five months of 2021 totaled 114 million metric tons, 21.5 percent ahead of last year. Monthly feed output is running 4-to-5 mmt ahead of same-month totals from each of the previous three years.

Source: analysis of China feed industry association data. 

The association says January-May 2021 swine feed production is up 75 percent from the same period last year. Jan-May swine feed output is also 10 mmt higher than the same period in 2018--before the African swine fever epidemic began. Poultry feed production surged during the ASF epidemic as many farmers filled their empty pig barns with chickens and ducks. With this year's swine rebound, January-May poultry feed output is down 6 percent from last year, but poultry feed is still 10-mmt ahead of its 2018 January-May total. 

Source: analysis of China feed industry association data.

The feed industry association reported that swine and poultry feed prices were up 14-to-17 percent from a year earlier. A June tour of Shandong Province--one of China's two biggest feed-manufacturing provinces--found that corn prices have started falling. The tour reported that feed mills were using minimal amounts of domestic corn. Instead, they were using domestic wheat, brown rice, and corn meal from imported corn ground up by new processing plants in tax-free bonded zones. Poultry feed was the predominant product, while swine feed sales plummeted due to disease in April and May. 

The Shandong feed mills reported using large amounts of corn meal from bonded zones in coastal cities. One manager said 27 new mills had been proposed in Shandong and 22 were approved. 

A May article in State media about a Qingdao bonded zone said the zone had one corn processor operating with three more scheduled to open soon. The zone offers preferential policies such as bonded warehouses and exemption from import quotas. Customs officials said the zones alleviate tight grain supplies by expediting imports but they also emphasized the importance of strict monitoring of processors to prevent unprocessed grain from entering the market. The processing plant manager apologized for not knowing all the rules.

Corn processors appear to be popping up in bonded zones all over the country. A company affiliated with Thai-based CP group claims to have six corn processing facilities in ports like Lianyungang in Jiangsu and Rizhao in Shandong as well as inland locations like Yueyang in Hunan Province.

Chinese authorities describe bonded zones as an initiative to streamline the import process and to give inland regions better access to imported corn. One customs article celebrated arrival of the first shipment of Ukrainian corn at a zone in Jiangxi Province's Ganzhou. A company spokesman said he planned to import 15,000 mt of corn from Ukraine.

A container of Ukrainian corn arriving at a Jiangxi bonded zone is decorated with a banner proclaiming it as an initiative to promote trade with "One Belt, One Road" countries.

Gansu Daily described a 700-mt shipment of Ukrainian corn that was expedited through customs clearance in a bonded zone at the Qinzhou port in Guangxi and then shipped by rail to a feed mill located in a "designated supervision site for imported grain" in Lanzhou. The feed mill reportedly supplies feed to meet vibrant demand in five northwestern provinces. 

According some reports, Chinese authorities cracked down on abuse of corn import quota exemptions by companies operating in bonded zones during May. One processor in a Shandong zone was closed. It was believed that canceled orders of U.S. corn would not exceed 1 mmt. 

Another topic of discussion in the Chinese industry is a new 5-year value added tax (VAT) exemption for grains, oilseeds, and edible oils imported for storage in government reserves. The exemption is in effect for 2021-2026 and replaces a similar 5-year exemption that expired this year. The new exemption has slightly looser reporting requirements, a 2-month longer effective period, and the exemption appears to apply only to VAT (not tariffs), but commentators seem to think the exemption covers all tariffs and taxes.

One online analysis observed that corn imports had already exceeded the annual tariff rate quota in the first five months of 2021. Noting that there is no official data on how much is imported by the government's reserve management company Sinograin, the author surmised that most of the 11.7-mmt corn imported was composed of tax-exempt shipments destined for reserves.

An online Grain and Oils News essay last week refuted worries that the exemption announced in May was "bad news" that exposed the Chinese corn market to downward pressure from international prices. The author argued that imported grain would remain in reserves with no impact on the market until it is auctioned. This author also speculated about how much imported corn is being stored in reserves, concluding it could be no more than 20 mmt this year.