July 30, 2004

Current Profitability in China's Live Hog Production Seen Unsustainable
 

An eFeedLink Exclusive Report

Official statistics showed that the net profit gained of late by Chinese live hog producers from selling a fattening hog, after discounting the hike in grain prices, has reached RMB100-200 or even more. Interest in live hog production has been greatly stimulated by the high economic returns, as can be seen from the change in the prices of piglets.

Having soared consecutively over several months, prices of piglets have shot up from RMB7.64/kg in mid-February 2004 to RMB9.26/kg at the end of June. Although prices are already at high levels, some backyard farmers have not relented in increasing their hog production. 

Industry experts believe that profit margin from current commencement of live hog production would shrunk, with the likelihood of incurring losses.

Exceptional circumstances contributed to the high procurement prices of live hogs in the first half of the year. While the fall in hog supply in the market plays a part in higher live hog prices, the primary impetus rests in the shift in consumer demand, triggered by the bird flu outbreak, from poultry to pork products.

Analysts believe that as recovery in the poultry industry gains speed, with consumption of poultry products returning to pre-bird flu outbreak levels, the demand for pork would subside. In the longer term, live hog prices are unlikely to stay high.

Extended studies by livestock experts deemed a hog-corn price ratio of 5.5 as the breakeven point in live hog production. Corn prices in China are expected to rise further in the near term, but it is unlikely that live hog procurement prices, which are already at high levels, will match the rise in corn prices.

Even if the hog-corn price ratio does surpass the breakeven point of 5.5, the excessively high prices of piglets would have eaten up the economic gains in live hog production. Analysts are of the opinion that it will be very difficult to sustain the current high economic returns in live hog production in China. In fact it may even given rise to a situation of live hogs sold at high prices with hog producers incurring substantial losses.