May 24, 2016
China's swine sector breaks price records for the very last time?
An eFeedLink Hot Topic 
  • The past decade has seen China's swine sector ignore record high hog prices
  • With output lagging demand, the country went from net pork exporter to the world's largest importer
  • The sector's inability to respond to strong price signals is due to agricultural policies that boosted swine production costs far above western levels
  • With the announced abolition of corn price controls, production costs should fall to the point that producers respond to price signals
  • Over the long run, the cost deflation will boost return, output and put an end to a decade long era of ever higher record pork prices
  • China's pork import volumes may also fall to levels lower than those recently forecasted
China's swine sector remains the world's largest but it is no longer dynamic or fast growing. It is one of the world's most expensive hog producers, with a tendency to break its own price records. Fortunately, the current record price peak looks to be its last for a long time and we should the next few years should see its supply fundamentals recover.
Accounting for approximately half the world's pigs and pork production, the sector is currently in the process of setting records that are destined to last for some time. For the third time in a decade, the second quarter saw China's live hogs hit a record price of RMB21.34/kg (US$3.26/kg). It was the fifth time in eight years that hogs broke their own price record. It broke the previous record price set in April of RMB20.50/kg (US$3.13/kg) and another price record set in the middle of 2015. It also exceeds the earlier record price set of RMB19.80/kg (US$3.03/kg) set in 2011. It also is significantly higher than the approximate RMB17/kg (US$2.05/kg) price record set in 2007.

Interestingly however, China's swine price inflation did not follow the classical economic assumption of producing a strong supply-side response. Instead, despite prices rising to ever higher peaks, each market rally resulted in a smaller supply-side expansion than the previous one.
For example, in 2008, the year after the 2007 price record setting rally, China's pork output rose a USDA estimated 7.8%. In 2012, after the 2011's record rally, it rose 5.8%. For 2016, despite repeatedly hog and piglet price records from mid-2015 to early this year, pork output is expected to fall for a second consecutive year, to its lowest level since 2012. At 53.50 million tonnes, China's pork production is down by 2.5% from 2015 and remain 5.7% below its peak 2013 level.
Rather than stimulating China's swine sector to produce more, record live hog prices merely draw in more pork imports. From approximately 50,000 tonnes in 2005 and 2006, imports rose to 182,000 tonnes during 2007's market peak and a record 709,000 tonnes in 2008, when for the first time, China's pork sector failed to respond to the market signal of record prices.

They fell back to 209,000 tonnes in 2009 but when hog prices set a record again in 2011, imports jumped to a record level of 758,000 tonnes. With the government using emergency reserve sales to control retail pork prices, the output of demotivated farmers could not catch up to demand, keeping imports near this level in 2012 and 2013.
Now, despite price records being repeatedly broken in 2015 and early this year, output is sinking but imports rose to 1.03 million tonnes in 2015. While domestic output languishes, imports are rising even higher, to a USDA estimated 1.32 million tonnes in 2016. –In ten short years, this has resulted in China turning from a minor pork exporter of note to becoming the world's largest pork importer (when imported pork re-exported from Hong Kong is added to official figures).
But while the government's deliberate deflating of urban pork prices is costing farmers much revenue, it is Beijing's feed grain policies which have made China's pork producers incapable of fully satisfying their domestic market. In particular, from 2008 onwards, China's official policy of maintaining corn self-sufficiency, while unexpectedly successful, kept the country's feed corn costs anywhere from 50% to over 100% above world prices for most of the last eight years.
As a result, by mid-2015, corn cost approximately over US$10.00/bushel in China and less than US$3.90/bushel in the rest of the world. As the largest but most feed inefficient of its livestock lines, the resulting huge spread in feedgrain costs impacted Chinese swine production more than those of any other protein line.
From RMB5.55/kg (US$0.67/kg) in 2002, eFeedLink figures show that China's hog production costs (averaged across farms with and without farrowing facilities) rose to RMB10.00/kg (US$1.58/kg) by 2010 and approximately RMB13.33/kg(US$2.11/kg) mid-2015.
With China's government keeping corn in the US$9.00-$10.50/bushel range for most of the last six years, the country's hog production costs went from slightly below American levels in the early 2000s to being anywhere from 35% to 75% higher over the last seven years. Ironically, while prices jumped to record levels, the resulting high cost base implies they should have risen even higher –except that the government dumped reserve pork to keep prices under control.
This means that while high feed costs made China's pork uncompetitive versus imports, government pork dumping kept its farmers from being motivated enough to fully supply the domestic market.
The good news (at last for China's hog farmers) is that with the government announcing its pork market liberalization, this era of record high Chinese hog costs, pork prices and import volumes is coming to an end. Ever since announced the liberalization of its corn market in the first quarter of this year, Dalian corn futures have fallen from prices above US$10.00/bushel a year ago to US$6.52/bushel at the time of publication –and will probably fall to below US$5.00/bushel by the start of 2017.
With the spread between Chinese and world corn prices in decline, so are hog production costs. Based on eFeedLink data, hog production costs at integrated farms fell from RMB13.20/kg (US$2.10/kg) in mid-2015 to below RMB11.80/kg (US$1.80/kg) by mid-2015 –and are on track to fall significantly lower by this time next year.
With costs in a profound downtrend, there will be no artificially high corn costs to push prices above their world average in the future. This means that when the next corn market cycle begins, barring any new, unforeseen market interventions, Chinese production costs should be at their lowest in a decade. Hog and pork prices will fall by somewhat less, restoring returns to levels that will motivate its swine sector to fully supply China's market.
This implies that imports may fall significantly below the one million tonne level. With the government allowing market signals to work properly and world feed costs destined to stay low for years, this implies that the days of China's swine markets hyper inflating to record prices at every market cycle peak are now over. The record hog and pork prices being seen in China this year may not be matched again for decades.

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