October 21, 2015
Has China's swine sector stopped growing?
Not really. Instead of stimulating China's vast hog industry, the country's rising pork demand is starting to boost the fortunes of leading exporters.
By Eric J. BROOKS
An eFeedLink Hot Topic
The past year has seen an interesting change has come over the world pork market. For many decades China, which accounts for over half of world hog inventories and pork production, led an otherwise stagnant world swine market. Ever since the 1980s, China's aggressive swine sector expansion offset weak demand growth in established, high consumption western markets.
Now however, the tables have turned. Led by fast rising consumption in Southeast Asia, the world swine sector's growth rate has turned upwards just in time for China's once fast rising output to flatten out.
The backdrop to this change was the three years from 2011 to 2014, which featured pork prices depressed by continuous government pork reserve sell-offs, high domestic feed costs and rising finishing weights. The latter led to three years of low hog and piglet prices. These in turn reflected poor returns made worse by the government showering urban residents with reserve pork sell-offs at peak celebration periods –which is precisely the time when hog returns should be peaking.
Consequently, profits were nil from mid-2011 onwards and a deep net loss margins were suffered from early 2014 through the first quarter of this year. Fed up with years of poor returns, early 2014 to May 2015 saw hog inventories fall by a whopping 94.4 million head. Equivalent to killing off the North American hog population, this culling included 10 million sows. That brought sow numbers below the critical 45 million head level, where sustaining current herd levels becomes difficult.
According to a Rabobank report on the topic ("China's Incredible Shrinking Hog Herd, Industry Note #505, August 2015), from approximately 475 million head in late 2012, the herd fell steeply throughout 2014 and again after Lunar New Year 2015, bottoming out just above 380 million head in mid-year.
Since mid-2015, although record high piglet prices helped stabilize sow numbers, this followed exceptionally low hog rearing returns in the run up to Chinese New Year. Even though eFeedLink reports that hog prices hovered at record levels from August through October, with the sow population having fallen from 50 million at the start of 2014 to 38 million in Q3 2015, there was just not enough reproductive capacity to mount a rapid supply response to the high prices.
Consequently, many production forecasts have been revised, from predicting flat hog production to China's most serious production drop off in decades. In contrast to the more conservative USDA, Rabobank for example, expects China's pork output to decline a whopping 6.5%, from 56.7 million tonnes in 2014 to 53 million tonnes this year. This output drop is equal to nearly two years of Canadian pork output or a third of what America, the second largest pork supplier, produces in a year.Moreover, with piglet prices rising 49% in the year ending September 2015, farmers were highly reluctant to invest in such costly herd expansion. Consequently, amid relatively scarce sows, exceptionally costly piglets and faltering personal incomes, hog inventories bottomed out in May and have stayed in the 445 to 449 million head range ever since.
August saw live hog prices set new records, peaking in the RMB18.00/kg to RMB18.50/kg range (US$2.83/kg – US$2.91/kg). Prices stayed in this range in October, when they usually fall and appear poised to rise higher in the traditional Q4 run up to the next Lunar New Year, which occurs in February 2016.
Moreover, high piglet costs are accelerating a trend towards large scale, integrated hog raising. Shi Tao, an analyst with eFeedLink's Shanghai office reports that "millions of backyard pig farmers have exited the industry over the past two years." While industry consolidation has been ongoing, the past two years have accelerated the trend. Moreover, even though China's swine sector is now in the early stages of a recovery, there appears to be no letup in the pace of industry consolidation.
This can be seen in a recent eFeedLink China livestock report. On one hand, it notes that during September, at large farms with farrowing units, hog farming costs fell by 1%, from RMB13.01/kg (US$2.05/kg) to RMB12.88/kg (US$2.02/kg), lower by RMB0.13/kg. On the other hand, for backyard farms that lack piglet production capability, hog rearing costs increased 4.9% to RMB15.35/kg (US$2.42/kg), up RMB0.71/kg or 4.85% from RMB14.64/kg (US$2.31/kg) in September.
Similarly, eFeedLink estimates that in September, hog farms with farrowing units made a net profit of RMB5.16/kg (US$0.81/kg), backyard farm profits only totaled RMB2.69/kg (US$0.42/kg). This makes large scale farms nearly twice as much profitable as their small-scale counterparts –and this earnings gap is rapidly expanding. Due to rising piglet replenishment expenses, September saw backyard farm profits plunge 32%, more than four times the much smaller 7.7% profit shrinkage at integrator farms with farrowing units.
Moreover, high piglet prices are extending this trend forward. Analyst firm Efeedlink Pte projected that in October, hog farming costs at large farms will rise by 1.01%. Backyard farms that lack farrowing facilities will see their costs rise by a far faster 2.87% in that same month. Consequently, the earnings spread will widen: For October, large-scale Chinese hog farms will see their profit margins increase 11.6% to RMB5.16/kg (US$0.81/kg); their backyard hog farming rivals will only see their profits rise 1.1% to RMB2.69/kg (US$0.42/kg).
Although China's economic downturn has dented pork consumption, it is falling by significantly less than the Rabobank estimated 3.7 million tonne output shrinkage. With high, government mandated feed prices keeping Chinese pork production costs twice as high as those found in exporters like America, Canada or Brazil, this has made for a large –but difficult to estimate– increase in pork imports.
Rabobank for example, is expecting pork imports to jump 45%, from 2014's 1.3 million tonnes to 1.9 million tonnes this year. While this is certainly plausible, China's deepening recession and recent devaluations of China's currency may result in pork imports totaling only 1.7 to 1.8 million tonnes.
Nevertheless, the Chinese swine sector's fall from world leader to growth laggard does contain wide reaching implications. Over the short term, by having increased import volumes by over a million tonnes in the two years since 2015, China is doing for the swine sector what it did for soya beans in the past: Providing a sustained source of demand guaranteed to keep pork export prices high for some time to come. That is welcome news for hog farmers, who feared that the US herd's recovery from PEDv would result in low prices and an oversupply situation.
Second, with Beijing having postponed the reform of China's corn market for at least a year, this tendency for China's high pork production costs to draw in imports is set to keep world pork prices and exports growing healthily through to the late years of this decade.
One thing is for sure: Facing both natural resource constraints and restrictive government intervention, the days of rapid swine sector growth appear to be over. Second, while the Chinese swine sector's growth potential appears to have been profoundly lowered, this is not the case with China's pork demand, which has defied all predictions and kept rising more swiftly than per capita chicken consumption.
Hence, with China's pork demand fundamentals staying healthy but its hog sector increasingly constrained, Chinese consumer demand has gone empowering the expansion of Chinese hog farms to stimulating the swine sectors of top exporters.
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