This past week we had visitors from China. The industry there is currently making fantastic money with China hog price of 19.54 rmb/kg liveweight calculating to $1.37 U.S lb. liveweight. A 250 lb market hog is bringing $340 U.S per head. Profits should be $120-150 per head. China has over 10 million market hogs per week. Total industry profits should be well over $1 billion U.S per week. The great monumental crater made by the huge losses over the past two years by the China industry that led to a sow herd liquidation of 11 million sows is bringing back the saying “The surest cure for low prices is low prices.” China profits are extraordinary and we expect them to continue for a long time as the China sow herd liquidation just recently came to an end. We expect fewer hogs over the coming months from the effect of the extended sow herd liquidation. Some have written that China is making up the lower sow herd base from higher productivity. That is insane. The sow herd dropped 20% from its highs. The only true indicator of supply in China is the hog price. It has increased $125 per head or 48¢ lb. U.S over the last few months. It has increased the same amount as the gross price of a current U.S hog. There is no way productivity is delivering a China hog supply overcoming the sow herd liquidation. Genesus is in the China market and has been the largest exporter of swine to China. There would be 95% of China’s market using swine genetics that are not competitive. The hog price of China of $1.37 U.S lb. is the true indicator of supply, there are far less hogs then in the past. Couple this with increased pork imports mainly from the European Union, it’s easy to figure that there are far fewer hogs. The Chinese group we had visiting this past week is building more farms, probably 40,000 sows this year, they are currently 180,000 sows. They are importing from Genesus to increase their productivity and meat quality. It’s exciting to be part of an industry revolution. China reminds us of 1994, when the U.S hog price collapsed, there was large sow herd liquidation, many small producers left the industry, the investors came in and built large operations. It worked for some but for many it didn’t. 1990’s was when the feed companies thought if they owned pigs they could move feed, they moved more feed, most if not all failed. Financially most feed guys never realized that feed was a piece of the cost of production, you need to be a pig operator to be successful. China will build new units, but they have many challenges despite the high profitability. There is a challenge to get capital, environmental, qualified labour, swine disease and high feed costs. *Capital- loans are not easy to acquire and new large farms take big capital. *Environmental regulations for sites are becoming more difficult as new laws and there regulation makes getting permitted more difficult. *Labour- hard to get qualified people who can manage a 5,000 sow unit, people who work to live on end of a barn for weeks at a time never leaving the site. The one child policy of China means fewer workers is making its labour more expensive. *Disease- Prrs, PED, Swine fever, foot and mouth etc. have to be dealt with. There are few high health farms. Pig mortality is high and usage of drugs and their total cost is significant. *Feed is double U.S costs. Much of it due to China support and control programs. China will be challenged to ever have a low cost of production. Last year the European Union increased pork exports to China at an equivalency of 5 million market hogs. U.S pork exports to China decreased. The U.S now has more pork plants China approved and the removal of paylean from those hogs should lead to more pork to China. We have talked to Chinese officials who believe long term due to the reasons we listed prior China could import 10-15% of its pork needs, equivalent to 60-80 million hogs per year. The purchase of Smithfield Foods by Chinese interests was never a gamble. They know there will be a market.
This post was written by Genesus