June 1, 2009
Sichuan's hog sector: How things are done differently in China's interior
Why in China's Sichuan province, medium scale farms, domestic hog breeds and local tastes make more economic sense.
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by Eric J. BROOKS
Most reports on China's hog sector emphasize growing scale, the predominance of western hog breeds and top down vertical integration. This is all true but it mostly reflects the most economically mature parts of China. There are vast parts of China where the local hog industry, more often than not, beats to a different drummer. Sichuan province, which most years ranks as China's largest hog producing province, is such a place.
Here, we find that hog industry consolidation has occurred, but relative to the larger farms found in places like Guangdong or Jiangsu, looks to stay relatively medium scale, at several hundred hogs per farm. Furthermore, we find no rush to western breeds and their admittedly superior feed conversion ratios.
Not everyone likes the west's pork
According to Liu Yi Liang, general manager and owner of Chengdu, Sichuan based Chengdu Nongxing Feed Mill Company, "In Sichuan and other parts of southern and western China, there is more demand for higher fat meat. In addition, backyard farm pork is tastier. That is because from the smallest road side stall to the fanciest eateries, in Sichuan, as in much of China, the taste of pork with a noticeably higher fat content is much preferred. That can only be obtained from traditional, Chinese breeds.
This is not to say that the consolidation that has not overtaken the rest of China's swine sector has not affected Chengdu. According to Liu, "In Sichuan, small or medium scale farming made up over 90 percent of the province's hog farms but today it is about 80 percent. Over time, we expect large scale farms to produce 40 percent of hogs, medium scale about 40 percent and the other 20 percent will still come from backyard farms." This is different from the rest of China where farms with thousands of hogs dominate and there is a smaller role for medium-sized farms with several hundred hogs. Liu explains that, "a unique mix of geography and hog species [preferences] means that there is a much larger role for medium scale hog farms in this province than there is in the rest of China.
Geography puts foreign hogs at disadvantage
According to Liu, the predominance of Chinese breeds in Sichuan is more than just a matter of local tastes. Thanks to Sichuan's climate and mountainous geography, foreign breeds raised in Sichuan neither grow nor breed as efficiently as they do when raised in other parts of China.
On the other hand, for local breeds, "The requirement for disease treatment is not as high and sow productivity is high at a low cost. In addition, because Sichuan hog breeding remains labor intensive, the costs are more flexible. With no large fixed capital expenses, we can adjust costs in response to changing prices or demand more rapidly." According to Liu, this gives a medium-scale Sichuan hog farms, "a 0.50 per jinn lower hog cost" than in large scale hog rearing operations.
Consequently, when dealing with a province that has niche tastes and unique hog growing conditions, mass production advantages cannot be assumed. Needless to say, in a country is large and diverse as China, there are numerous instances where local tastes and geographic conditions will intersect in the same manner that they do in Sichuan. Liu states that, "For pig rising to be profitable, you have to understand the local environment and conditions. It doesn't mean that just because you are big, you will make profits."
This is not to say that some parts of the integrated hog farming model pioneered by feed to meat giants is not applicable to Sichuan. One Sichuan-based company, the Wen Group in Kwantung, very famous for introducing broiler contract farming, has introduced hog contract farming to Sichuan.
Need to fuse Chinese taste, western feed conversion ratios
Furthermore, despite Sichuan's unique exceptionalism, it does not change the fact that preferred local hog breeds do suffer from a feed cost disadvantage. That is why according to Liu, "If any investment is taking place, it is to raise the feed conversion ratio, as it is lower than in western breeds."
This is also where companies like Chengdu Nongxing Feed Mill Company come into the picture. Traditionally, a supplier of hog and broiler feed to Sichuan farmers, the company is now expanding vertically into hog breeding. Chengdu Nongxing intends to unite the superior feed conversion ratios of western breeds with the unique taste of locally bred, Sichuan hogs.
Even here however, Liu practices what he preaches and intends to keep his breeding operation medium scale. Despite the fact larger farms attempt to leverage scale economies, Liu states that, "My breeding operation will not exceed 300 sows. This is in accordance to hog breeding model pioneered by the French model, which says that once you go beyond 300 sows, it become unmanageable."
Chengdu Nonxing also intends to set up a medium size commercial farm, but this is intended to be more of a marketing tool for its hog breeding enterprise. Liu explains that, "Once you have your own breeds, you must show that you can produce the pigs yourself, to create confidence and show there is a market for this." His plan is to commence selling hogs with local taste characteristics and western feed conversion ratios to local contract farmers in 3 to 5 years, along with hog feed specially formulated by his company's own mills. After that, he anticipates entering pork processing five years down the road, further leveraging his intimate knowledge of hog breeding, feed formulation and Sichuan's unique geography and climate.
All this points to another unique Sichuan swine industry characteristic: Unlike other, less developed areas of China, not all feed to meat integration occurs from the top down. Nor is it always led to well capitalized eastern Chinese or foreign giants.
In places like Sichuan, there remains much scope for bottom-up integration, beginning in simple feed milling and moving up breeding, commercial farms and meat processing. This interestingly, is actually the way in which today's top-down, vertically integrated giants such as CP got started.
Hog Casing: Transport disadvantage vs. environmental quality advantage
Nor is the difference between Sichuan and the rest of China restricted to the main parts of the feed to hog supply chain. Even in swine industry by-products, Sichuan has a way of standing alone. For example, Chengdu Fengying Natural Casing Company exports over 95 percent of its hog casings, just like its counterparts in Guangdong or Jiangsu. Yet, Liu Jen, its general manager reports that unlike its competitors in eastern China, who import raw casings from the west, in Sichuan, they are locally sourced.
There are two reasons behind this. First of all, Sichuan's interior location. In Jiangsu, imported hog casings merely have to be trucked in a short distance from nearby Shanghai. Sichuan's interior location makes transport costs prohibitive, forcing casing manufacturers to rely on local supplies. In other parts of China, this is often a problem, as most Chinese hog casings have a problem with their reputation. This makes casings made from local intestines unexportable in parts of China.
Here however, Sichuan is at an advantage. Thanks to its relatively unpolluted environment and high water quality, Chengdu's raw hog intestines are widely acknowledged as the most high quality ones in China. This permits them to export a product using raw materials that foreign buyers demand be imported in other parts of the country. Sourcing locally enables local hog casing suppliers such as Chengdu Fengying to capture more of the production chain's value, thereby enhancing their profitability.
Nor is Sichuan allowing economic development to ruin the water quality on which its hog casing exports depend. All hog casing plants are, by law, required to pipe their water to a state of the art government waste treatment facility. At Sichuan Guanghan Zhongwang Food Company, general manager Pu Bang Yu reports that the government has subsidized the construction of his new casing plant, as his old one did not meet new, strict environmental standards. Scheduled to open within months, the new plant has double the capacity and state of the art infrastructure, with a direct connection to government waste treatment facilities.
As diverse as America
Being in relatively underdeveloped western China, there can be no doubt that hog farms in Sichuan and similar provinces will eventually take on some characteristics of their more advanced competitors in the country's south and east. In this context, breeders like Chengdu Nongxing are acting like middle men, bringing in necessary genetics while ensuring unique local meat characterisitics are preserved.
What becomes clear however is that, China, like America, is so vast that it is really like several countries rolled into one, each with its unique local features. Moreoever, with Sichuan and many other remote provinces sporting populations of well over 20 million, they have the market size to sustain unique, local preferences in their hog and poultry meat.
Add to all this unique climactic differences and what works in one part of China must, at the very least, be adapted to unique local characteristics. Everything from hog farm size to the types of breeds and feed to meat taste must be adapted to local geography and culture. This gives much scope for regional companies to leverage their unique knowledge of these factors to their advantage. Hence, as western China develops, do not be surprised if some of their far sighted local feed, livestock or meat processing companies vertically integrate themselves into national giants or become global exporters.
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