Pork Reserve to Bolster Hog Farm Confidence

Chinese authorities are planning to buy as much as 200,000 metric tons of pork for government reserves to bolster the confidence of pig farmers shaken by the African swine fever epidemic.

The 12-percent shrinkage of China's swine inventory last year reported by the Ministry of Agriculture and Rural Affairs was the largest decline ever recorded, according to a China Agricultural university professor who spoke at a press conference on ASF put on by the Ministry last Friday. The professor attributed the shrinking herd to farmers' worries about African swine fever that discouraged them from replenishing herds; cash flow shortfalls; accelerated withdrawal of small-scale farms due to industry upgrading; and consumers shifting purchases away from pork to other foods. The professor assured listeners that officials are pondering policy measures to help farmers deal with the difficulties and urged farmers to exercise good prevention and control measures and add to their herds to take advantage of expected high prices later in the year.

Futures Daily reports that purchases of pork for government reserves will begin March 8. The purchases are expected to be carried out in two 100,000-ton tranches purchased during March and late April and early May.

Zhue.com.cn says the first 100,000-ton purchase this month is confirmed but there are varying rumors about the total amount of reserve purchases. The history of reserve purchases they report indicates this could be the largest purchase of pork for reserves since 290,000 tons were purchased over 11 months during 2009-10. Only 10,000 tons were purchased in 2017 and 2018 and none was purchased in 2015-16.

Chart shows past purchases of pork for reserves and price trends from 2009 to 2019

Market analysts told Futures Daily that pork reserve purchases are generally not large enough to have much effect on price. The purchases are made by contracting with slaughterhouses that receive subsidies to buy and store frozen pork. The main impact is to bolster the confidence of farmers, which encourages them to hold back animals in hope of higher prices. One analyst said reserve purchase contracts are often not fulfilled when prices do go up because slaughterhouses find purchases unattractive, even with a subsidy.

Many investors are convinced hog prices are about to rebound in the second quarter of 2019. Prices could rise from the current 14-15 yuan/kg to over 21 yuan/kg late in the year.

Zhue.com.cn reports that supplies of both hogs and piglets are already tight and prices are rising in many provinces.

During the "blue ear disease" epidemic in 2007, officials gave out 100-yuan-per-head subsidies per productive sow to encourage farmers to keep sows during downturns in the market. In 2009, a "hog price alert" mechanism was launched as a market stabilization tool that would monitor the hog-corn price ratio and a series of other indicators that would trigger purchases and sales of frozen pork reserves. Both of these hog market stabilization measures seem to have disappeared and are not being publicly discussed.