Sunday, July 25, 2021

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.

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