Jim Long’s Pork Commentary: China, China, China (April 17, 2017)

Pork Commentary

Jim Long, President-CEO Genesus Inc.

April 17, 2017

China, China, China

China’s current hog price liveweight is 16.49 CNY/kg, or $1.08 USD liveweight/lb. The U.S.A. liveweight price is $0.47/lb and Spain $0.62/lb. It doesn’t take an ag-economist sitting in a university cubicle to figure that Chinese producers are receiving up to $125 per head more than U.S. producers. A reflection of Chinese domestic supply and demand.

Other Observations

Despite record profits, China Agri reports that in February, China’s sow herd declined further 0.5% from January to 36.3 million. China’s sow herd has declined about 9 million from 45 million in February 2013. Obviously, it’s hard to increase hog numbers if sow herd keeps declining.
China imported 181,900 tonnes of pork in February, an increase of 153.8% year on year. We calculate this tonnage is equal to about 2 million market hogs imported for the month. It is obvious China’s supply is far from meeting its current demand level. If and when the hog price declines in China, lower pork prices will increase pork consumption, increasing tonnage demand.
In U.S.A., there has been no surplus of slaughter capacity over the last while. Packers have had good margins. Consequently, new packing capacity is under construction. In China, a different story. The consequence of 9 million fewer sows. According to China Agri, there are 5,000 pig abattoirs in China. They still produce carcasses (65% of output), ahead of fresh pork cuts (20%) and processed pork products (15%). They are currently working at 30% capacity. 30%! Even Sheung Shui (Smithfield) with an output of 13 million pigs works at 40% capacity. Average margin for primary processing is 5.5% against 20-30% for large-scale secondary processing. Surprisingly, the percentage of pigs slaughtered in large abattoirs has fallen from 24% to 31% between 2010 and 2016.
One of the constraints on China’s swine production is the government’s need to consider its policy package to address concerns of both environment protection and pork supply in terms of land law and subsidies. Currently, many hog farmers are simply forced to shut down or demolished due to the environmental policy. From what we can understand, these factors are part of the reason China sow inventory continues to decline.

When there are good profits in the hog industry, there is always expansion. China will be no different. It’s not if, but when. Profits of around $100 USD per head month upon month will lead to more hogs.

In a report from Hu Song of CSEA, the swine sector is a hot area for Chinese Investors in 2016. The total investment related to swine from public companies in stock markets was 41.4 billion RMB ($6 billion USD), accounting for 84.4% of total investment in the livestock sector, increased by 9.5 times compared to 2015. The 2016 investments were spent in 153 swine projects, located in 22 provinces. It is estimated the new barns will produce 27 million hogs per year on its designed capacity (Ms. Wang Xiaoyue, analyst from New Hope).

In 2016, Genesus was the global leading exporter of swine genetics to China. We continue to see the reality of new sow barns in China in 2017. The interesting factor is up to now liquidation of existing sow herds continuing to outstrip the new construction.

Billion dollar question: when will that phenomenon stop?

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