July 18, 2011

 

China's hog rally likely to lose steam by September

The 16-month long rally in Chinese pork prices could start losing steam by around September as farmers bring a fresh batch of pigs to the market, China's top animal feed producer New Hope Group said Friday (Jul 15).

 

But increased supply will probably only brake the pork price, as farmers have been cautious in replenishing pig stocks due to fear of disease and concerns that high prices have already cut Chinese appetite for the meat.

 

"Supplies should improve slowly from August and recover by September, but it is still hard to say if the supply picture will change dramatically by that time," said Wang Hang, vice president of New Hope.

 

China's pork prices have been galloping higher since March 2010. They hit a record high of RMB23.61 (US$3.65)/kg in mid-June, up 57% from a year ago. The relentless rise has boosted Chinese inflation, which hit a three-year high of in June.

 

High pork prices at home mean Chinese buyers continue to import from the US, where US hog futures have already soared on expectations that China would need to import more pork.

 

The USDA report on Wednesday said China has bought nearly 130.5 million lbs of US pork in the first five months of the year, up 20 times from a year ago.

 

Pork is the most popular meat in China, where an average citizen consumes some 37 kg per year.

 

Pork prices have been driven to record highs because of a fall in the number of pigs being bred following low prices last year. The rising price of corn at home has also forced out many small farmers.

 

Liu Yonghao, chairman of New Hope Group, said China should raise the import quota of corn processing firms, to help boost supplies and lower feed costs, which would in turn encourage farmers to rear more pigs.

 

"If China is already importing pork from the US, then why can't it import more corn?" Liu said, adding that high imports would benefit both feed mills and farmers.

 

New Hope said its feed mills have begun to replace expensive corn with wheat. Corn substitution has reached as much as 60%.

 

Industry participants estimate that China may buy more than five million tonnes of corn from the US this year as the government rebuilds its state reserves.

 

The rising costs of rearing and the high risks involved are combining to transform China's pig industry from individual household breeders to large-scale farms.

 

Backed by expectations that China's appetite for pork would grow as living standards improve, several enterprises, such as COFCO, have poured in billions of yuan to enter the pork farming business.

 

New Hope's Liu said large-scale breeding farms could make up 70-80% of the market within five to 10 years, compared with the current 60%.

 

"Such a shift has begun from the country's coastal areas to the central provinces, although the shift in western areas is still quite slow," Liu said, adding that the firm plans to set up a massive pig farm in Liaoning province, the country's major grain area.

 

Larger pig farms would in turn increase the country's demand for feed grains such as corn and soy. China is already the world's top importer of soy, a majority of which is crushed into soy meal, a key feed ingredient.