Live hog prices in China recovers as supply tightens
From a downward trend that began in the second half of 2011 to eventually fall below RMB 11 per kg in the first half of 2014, live hog prices in China have been on a bounce since mid-2015, suggesting that the market has shifted from oversupply to tight supply. As of March 2016, prices have peaked at about RMB 19 ($2.93) per kg, almost the same level as September 2011 which registered the highest live price – RMB 19.68 ($3.04) – in the last twelve years. The hog-to-corn ratio has also increased to above 9, which means that farmers' margins are now between RMB 300 ($46) to RMB 600 ($92) per head coming from losses which prevailed for most of 2014 and the early part of 2015.
Figure 1. Live Hog Prices by Month from 2004-2016
*Break-even point(6.0) is used to help evaluate the profitability in pig production. If hog-corn price ratio is higher than the break-even point, it commonly indicates profits are being made.
The tightening supply situation is a direct result of the depopulation in China’s pork industry which started in 2014, releasing the overcapacity of the past three years. Figure 2 below shows that the national sow herd has fallen to around 42 million in 2015, a decrease of more than 15% versus 2012. That's a cull of about 7 million sows – roughly equivalent to the entire US and Canadian herds! Because of this, the pigs marketed in 2015 dropped dramatically and continued to fall to 157.67 million heads in Q1 2016, down 9% from the previous quarter (see Figure 3). Rabobank, in their recent quarterly pork report, expects the hog supply to decrease further by 3% in 2016, given the small sow herd size throughout 2015.
Figure 2: Sow Herd Size Change 2009-2016
Figure 3: Pigs Marketed 2013-2016
As shown in Figure 4, pork production volume correspondingly fell to 52.73 million tons in 2015, down 7% year-on-year. Using the per capita pork consumption of 40 kg, the same chart shows the gap in pork supply, based on the total Chinese population of around 1.37 billion. Overall, tight supply and the slow pace of herd replenishment are expected to continue to support strong hog prices for the balance of 2016.
Figure 4: Pork Production vs Consumption 2000-2015
Source: National Bureau of Statistics of the People's Republic of China, Boyar
Meanwhile, China's farm structure is projected to continue to evolve, as shown in Figure 5 below. Stricter environmental regulations, requirements for better production efficiency, and food safety, all indicate that larger companies will continue to expand and backyard farms will continue to decline at a faster pace. This process may not offset the decline in supply quickly due to both capacity and productivity, so China is expected to further increase pork imports in 2016 to close the gap between production and consumption.
Figure 5: Structure Evolution of China's Pig Farming
As for overall farm efficiency, there has been a slight increase in terms of pigs marketed per sow per year as shown in Figure 6 below. This will help somewhat in closing the shortfall in production due to the lower sow population.
Figure 6: Farm efficiency (2009-2015)
Large scale, progressive producers using PIC Genetics are at the forefront of this trend, registering world-class productivity; for example, Yunnan Shennong 30+ PSY, New Hope 31+ PSY, and CP 28+ PSY. Compared to the national average of below 15 PSY, it is clear that the pressure on becoming more competitive will push the industry to modernize using genetics, nutrition, facilities, and health management, at an even faster pace.