China increased its pork output in 2023 to a near-record level. But prices plummeted, indicating the market didn't want that much pork. Analysts say the industry needs to downsize, but companies backed by friendly banks and officials are content to burn through cash until prices pop again.
China's National Bureau of Statistics reported that 726.6 million hogs were slaughtered in China during 2023, a 3.8-percent increase from 2022. The volume of pork produced was 57.94 million metric tons, a 4.6-percent increase from 2022.
Last year's pork output was the largest reported in the Bureau's statistics since 2014. It exceeded the target of 55 million metric tons for 2025 set by the 5-year plan. Hog slaughter was the third highest ever reported. The only time China slaughtered more hogs was during 2013-14.
The numbers imply 79.7 kg of meat per hog, a 500-gram increase from the previous year and 2-kg more than in 2014. Heavier hogs are consistent with reports of widespread "secondary fattening"--purchasing mature hogs and raising them to even heavier weights--that has become common in China during the 4 years since the African swine fever epidemic.
The Bureau's index of prices received by farmers showed that hog prices fell 14 percent during 2023. That was the biggest decline of any farm price. Fourth quarter 2023 hog prices were down 31 percent year on year. The drop in prices tells us that Chinese farms produced more hogs than the market wanted.
Tracking raw material purchase prices reported by the Bureau illustrates the long-term problem facing China's hog industry. After 6 years of wild gyrations during the trade war, African swine fever, and COVID-19, Chinese hog prices in December 2023 were almost the same as 6 years earlier in January 2018 (4 percent less to be precise: January 2018, 14.97 yuan per kg; December 2023, 14.3 yuan per kg). Meanwhile, prices of the main feed raw materials--corn and soybean meal--were up 33 percent over that same time period. Costs have risen but the price of hogs hasn't.
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| Indexes calculated from average raw material purchase prices reported by China's National Bureau of Statistics. |
Earlier this week Jiemian News reported that China's hog industry needs to reduce production capacity as companies incur mounting losses and run into cash flow problems. However, government officials and State banks have been ordered to backstop companies with unlimited credit, so there is little market discipline for overproduction.
With hog prices below the production cost, the more hogs companies produce the more cash they burn. Twenty-two of 32 publicly listed hog companies lost money in the first three quarters last year. Jiemian described reports of 370 million yuan in overdue debt incurred by Fujian hog farming company Aonong as an alarm bell for the industry. Companies are carrying substantial debt loads. Aonong has a debt-asset ratio of 89.4% and Tianbang has a ratio of 87%. Another company, Zhengbang, already went into bankruptcy reorganization.
One industry analyst told Jiemian that the industry needs to shed about 10 percent of its production capacity, but companies are hesitant to scale back because they want to maximize their gains if there is an upturn in prices. The expert estimated that there would be only a 5 percent reduction of capacity. There is little hope of a rebound in prices.
Muyuan inadvertently explained why companies are not being forced to cut capacity. Muyuan said State-run banks regard Muyuan as a "strategic customer", and they are willing to extend nearly bottomless credit at low interest rates. Muyuan obtains 70% of its credit from the Agricultural Bank of China, China Construction Bank, and Bank of China and still has a 30-billion-yuan line of credit. Last year Muyuan paid 4% interest on new bank loans. Muyuan's debt grew from 59.3 billion yuan to 78 billion yuan last year.
The three top companies--Muyuan, New Hope, and Wens--produced a combined 100 million hogs in 2023, a record volume. Regarding Muyuan, one analyst pronounced, "Even if [the company] does not make money there is still no problem in ensuring that it does not collapse."
The analyst points out that even if a company goes out of business its assets will likely be taken over by another company--i.e. no reduction in industry capacity. "The local government will provide certain support out of consideration for stabilizing production," the analyst explained.
Small independent farmers with less access to credit may be forced to downsize. The Statistics Bureau's report said that the national inventory of hogs declined 4.1 percent during 2023.
"Many experts" told Jiemian that this winter's hog disease outbreaks could be the straw that breaks the camel's back. According to New Hope Group, another hog-farming giant, disease outbreaks came earlier than last year, affecting both company-operated farms and smaller independent farm contractors. Disease increases cost by reducing piglet survival rates, reducing success rate of sow breeding, increasing death losses of fattening hogs, and inducing farms to make additional expenditures to prevent and treat disease.
Interestingly, the U.S. pork industry is also in downsizing mode. Articles like the Wall Street Journal's "America Has Too Much Pork" cite plummeting sales to China as one of the reasons for American companies shuttering farms and processing plants.
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