It has been a very somber 2014 for China's pork and poultry sectors. As a general rule, China's swine and broiler sector inventories, prices and profitability all peak in the months preceeding Chinese New Year. But no such thing happened this year.

 

Since mid 2013, China's economy has been in the grip of a serious slowdown, resulting in disappointing demand growth for both chicken and pork. Along with the bad economic news, extraordinary one-off events are devastating swine and poultry's consumption, prices and most of all, farming returns.

For example, eFeedLink's statistics indicate that from January 2013 to January 2014, at farms that produced their own piglets, hog rearing costs increased 1.7%. Over this same time, live hog prices plunged 20.7%, from RMB17.27/kg to RMB13.70/kg, wiping out profits. Swine prices and returns usually peak in the month preceding Lunar New Year (which occurred on January 31st). This time however, January saw average hog prices plunge 13.35% from December's level.

 

In fact, at no time during the past year did hog prices approach their early 2013 peak. In fact, January ended with hog prices 22.2% lower than at the same time a year earlier -and at RMB12.90/kg no higher than they were in  May, when hogs had just been hammered by their cyclical a second quarter consumption nadir coincident with the chilling impact of an early 2013 year hog disease outbreak. With hog input costs staying firm, profits at farms that produced their own piglets went from a RMB3.64/kg profit in January 2013 to a net loss of RMB0.12/kg this year.

 

According to eFeedLink's monthly China Livestock Tracker, from August 2013 to January 2014 inclusive, China's hog inventory fell by 1.93%, from 475.42 million to 466.26 million. These five consecutive months of decline are unusual, as the four months preceding Chinese New Year usually see hog numbers, prices and swine farming returns hit their yearly peak. That's because after falling in early 2013, hog prices barely recovered.

 

With prices falling nearly 20% from August to December, farmers first gave up on expanding their herds. Later, an unusually cold winter caused a high number of disease outbreaks, leading to much panic selling of immature hogs in January, so that 2014 began with a market crash. This was a disastrous start to the Lunar New Year of the Horse, as pork consumption cyclically falls from the start of China's traditional calendar through to the second quarter.

Even so, the broiler market is in an even more disastrous state. Thanks to December 2013's discovery of dangerously high antibiotic levels in KFC's chicken, 2013 began with unusually low pre Lunar New Year prices, which devastated that year's profits. Several months later in early 2013, poultry consumption was bottoming out when an outbreak of H7N9 virus killed hundreds of people.

 

That made second quarter 2013 chicken consumption fall off a cliff, with the forced culling of birds causing broiler inventories to fall 25% from March to May. Demand fell even faster than supplies; by early June, prices had fallen some 33% from their 2013 Lunar New Year highs.

Thereafter, as the epidemic faded, demand recovered, and China found itself acutely short of broiler meat. A classic, V-shaped recovery took hold and by September, prices had jumped 58% above their late May lows -and within range of their November 2012 to February 2013 highs. Inventories followed: Broiler numbers, had fallen from 1.24 billion in January to 930 million by May. They now recovered a whopping 41.9%, exceeding their pre-crisis level and peaking at 1.32 billion head in November. Supplies grew faster than demand. With China's economy decelerating, broiler prices peaked in August, falling 5% to 10% through to November, depending on the broiler breed. The softening broiler market made inventories level out, falling 0.6% from November to December.

 

After November, the broiler sector suffered a new set of stunning blows. H7N9 bird flu reappeared in chickens, spread to Hong Kong, Taiwan, and killed people as far away as Canada. In December, with H7N9's foot print expanding, it appeared things could not get worse, but they did:

 

Yet another bird flu strain, H10N8, also broke out, causing even more deaths of both chicken and people. With consumers shunning chicken for the second time in a year, prices went into free-fall just in time for the critical pre-Chinese New Year period. In particular, with the government closing down wet markets, prices of China breed broilers (which are often purchased live) fell 20% but even the 10% drop in AA broiler prices could not have come at a worse time.

But with bird flu decimating chicken populations and the government carrying out mass cullings, even though panic selling deflated the market, the devastating impact on inventories meant that instead of going up as they always do, the number of broilers released to market actually fell. Broilers had just regained profitability in the late third quarter. In January, they plunged sharply into the red, incurring net loss margins of RMB1.39/kg and RMB2.39/kg for large scale and backyard farms respectively.

 

Although China's economy is tilting towards recession, hog and broiler numbers are falling to quickly to reflect the resulting drop in consumption. Yet with prices as depressed as inventories and margins in the red, there is no incentive to expand production once the post-Lunar New Year slack consumption period ends. This implies that once this winter's livestock disease outbreaks fade away, China's hog and broiler sectors could swing from deflation to spiraling inflation rapidly, with government dumping of meat supplies and imports being used to bridge the resulting supply gap.