April 22, 2014
China's swine sector: Lots of foreign pork on the horizon
The contradiction between the country's feed crop policies and artificially low pork prices will be resolved by an impending surge in pork imports.
By Eric J. BROOKS
An eFeedLink Hot Topic
The last seven years have been wild ones for China's huge swine sector, which accounts for over half the world's pig population. In retrospect, 2007 marked a turning point, where domestic feed shortages, rising input costs collided with several mutually contradictory government policies.
Ever since that time, Beijing has tried to promote feed grain self-sufficiency by ensuring crop farmers get high returns, while keeping the price of pork (which makes up 60% of meat consumption) low. Of course, in a country running short of arable land, it is impossible to give feed crop farmers high enough feed crop prices to maximize their planting of corn, and keep hog production costs low at the same time.
If it wasn't enough that one policy contradicts the other, periods of high pork price inflation are usually met with government sell-offs of stockpiled pork. For seven years, this has repeatedly undercut hog farm profits at occasions like Chinese New Year or the Mid Autumn Festival, when their returns should be peaking.
The country's swine sector has been trapped within this contradictory slew of policies for the better part of a decade; something had to give, and several things did.
First, government sell-offs of stored, frozen pork during peak demand periods undermined the profits of all producers, it also accelerated the industry's consolidation, though this process still has a long way to go. In 2007, eFeedLink research indicates that integrator hog rearing unit production costs were 95.2% of those incurred by backyard farms to produce the same quantity of pork. By 2013, integrators' unit hog production costs had fallen to just 82% of those incurred by backyard farms.
A production cost differential of nearly 20% (and rising) does, of course favour larger producers but government policies unleashed other factors. For example, while government policies put profitability on a downtrend, it did so especially for backyard farms, which are on the way to suffering a third year of negative average returns.
Consequently, integrators and commercial farms went from supplying 6% and 18% of China's hogs in 2004, to 18% and 44% in 2010. After 2007's feed price hyperinflation and government price controls, integrators accounted for 18% of the country's swine output while commercial farms made up 44%. But the consolidation truly took off during 2011-12's feed cost inflation. Even though there were record hog prices in the first of these two years, corn and soy costs soon outraced them.
Furthermore, both in 2007 and in 2011-13, backyard farms where burdened by very high piglet prices. By comparison, commercial farms and integrators bred their piglets in house, sparing them this major expense.
As a result, eFeedLink's hog market tracker found that over the last two years, there were many occasions when China's overall hog inventory increased but the number belonging to backyard farms fell. Hence, it estimates that by the end of this year, integrators will account for 52% of hog production and commercial farms 32%. Backyard farms, which produced 74% of China's hogs in 2004, will only supply 10% of this year's total.
With integrators capital-rich enough to afford imports of leading western parent stock, finishing weights have also risen, from 97.0kg in 2005 to a peak of 112kg in 2013.
However, even with large scale producers expanding the quantity and proportion of China's hog supply, the above mentioned combination of high feed costs, government suppressed profitability, domestic feed shortages and strict corn import controls damaged them too: China's pork production is having trouble keeping up with demand growth, which has been roughly 3% per annum in the years since the 2007 market inflection point.
As a result, China which was a leading pork exporter prior to 2007, saw import volumes rise by a factor of more than ten. According to eFeedLink's market research, in 2013, they totaled far higher than the USDA's 750,000 tonne estimate, approximating 1.3 million tonnes. This estimate moves China's pork import volume from its number two position to make it equal that of world leading Japan.
Going forward, eFeedLink expects this import volume to increase very rapidly. According to Shi Tao, an analyst with eFeedLink's Shanghai office, "Pork imports will increase, especially during and after 2015. This is mainly due to Shuanghui's acquisition of American integrator Smithfield. Shuanghui will need the quality pork, which is cheaper as well, for its processed products."
Shi added that, "Shuanghui is constructing designated ports for importing pork from the US in its Henan headquarters. The port is scheduled to start operation by late 2014."
Needless to say, a leading Chinese pork supplier of Shuanghui's size and scale does not make a decision to construct the infrastructure for mass pork imports without official, government approval. This implies that even if they are doing so in an unannounced, unofficial manner, China's policymakers realize that the only way out of the contradiction between controlled swine rearing returns and low prices is through an import safety valve.
Unlike neighbouring South Korea or Japan, China's market is far too large for imported pork to supply more than a small fraction of its total consumption. Nevertheless, imports appear destined to grow strongly in years to come. Hence, over the next few years, it would not be surprising to see China's pork imports support the world pork market in the same manner that it stimulated prices and demand for soya beans.
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