In China, the second quarter's traditional hog inventory expansion was held back when the dumping of 20,000 diseased hogs caused market anxiety and prices to sag. But the falling demand was outpaced by an even greater supply-side response, as farmers feared low returns and did not undertake the cyclical, early second quarter re-stocking of their herds.

 

But the real story was how, even when losses approached RMB2/kg (US$0.26/kg) or approximately RMB200 per head (US$32.60/head), hog numbers did not fall in the sharp, volatile manner they did during recent downturns in swine profitability.  According Rabobank's late July report on China's swine sector, "This could be due to structural changes farms have undergone; the majority are specialized and mid-sized farms, and will not easily start liquidation [of their hog herds]. This presents a different picture than previous cycles, when backyard and small-sized farms dominated the market. "

    

Hence, unlike the price crashes of 2010 or 2012, which saw hog numbers fall, 2013's larger scale farms had sufficiently deep pockets to ride out the storm without releasing hogs prematurely or ceasing their piglet replenishment.

    

This supply-side restructuring coincides with demand-side changes. When the swine epidemic quickly dissipated, the H7N9 bird flu outbreak motivated consumers to substitute pork in place of their regular chicken consumption. Hence, after bottoming out in mid April near RMB12.00/kg (US$1.93/kg), late May and June saw double digit price gains in live hog prices. By early August, live hogs were selling for RMB15.00/kg (US$2.45/kg), some 25% above their April lows.

 

With China's farmers needing a hog price/corn price ratio of around 6 to make a reasonable profit, the ratio went from 4.5 in mid April to slightly over 6 in mid August. Profitability returned as the market passed its mid-year period of slack demand on an inventory draw down.

 

With profitability restored and the Mid Autumn Festival, National Day holidays and Chinese New Year promising six months of rising pork consumption, inventories have started rebounding: At an eFeedLink estimated 475 million head, August finally saw China break the all-time hog inventory record that it set in the second quarter of 2007.

 

 

  

Going forward, with China's pork consumption cycle turning upwards throughout the rest of the year fourth quarter and peaking in late January 2014, live hog prices are poised to rise another 15% to 30%, depending on how much reserve pork the government dumps on the market before Chinese New Year.

 

International corn prices are currently 50% below those in China, at levels last seen in 2010. On the protein meal side, CBOT soy has dropped below US$12/bushel. This means that as live hog prices rise with late year hog demand, feed costs should stay roughly constant, allowing the live hog to corn price ratio to rise above the critical 6.0 level. Unless excessive official reserve dumping occurs, this should encourage farmers to continue boosting hog inventories, and they should approach the 500 million number by this year's end.

   

With demand unexpectedly low in the first half of 2013, China's pork supply shortfall was smaller than expected, causing January to April imports to fall by 6.2% from their levels during the same period of 2012. With inventory growth expected to rise faster than consumption, the need for imported pork is expected to stay slightly below last year's levels in the second half of this year too.

 

All taken, this should cause pork imports to fall 26% from 2012's record 1.3 million tonnes, to one million tonnes this year. But China's long-term pork trade remains the weakest of all its major meat lines.

 

Sooner or later, feed costs will rise again and provided that hog prices are allowed to rise in a manner that reflects this, it would not matter. But the next round of feed price inflation will almost predictably be met by the dumping of reserve pork into major urban areas. That will make affluent consumers happy over the short term but once more remove the motivation to expand hog herds over the medium term.

After 2007, China government began to actively intervene in pork markets, to tame its retail selling price. Not surprisingly, that was the year turned pork net importer and hog numbers only exceeded that 2007's peak when this year's stable feed prices and falling second quarter pork demand deflated the market. Such a rare coincidence is unlikely to recur when normal market conditions resume.
 

From 2007 when the government began to proactively control pork prices to 2012, pork import volumes increased by 1,311%, as suppliers were insufficiently motivated to expand their herds in line with China's rising pork consumption.  When feed cost inflation again pushes up China's pork production costs to politically unacceptable level, pork import growth will resume, as they function as a politically expedient price safety valve.