Cloudy Outlook for China’s Pork Sector in 2015

With approximately a month until the lunar New Year, China’s pork prices remain uncharacteristically flat, leading to speculation in the trade that any possible market rebound may not materialize until the second half of 2015. Official reports suggesting that the sow population is undergoing an aggressive culling are supporting bullish sentiment by some analysts, but others question the veracity of the data. Bearish signs include weaker foodservice consumption related to softening GDP growth and the ongoing modernization of the swine production sector, which is increasing overall productivity. The recent decline in U.S. prices has widened the China-U.S. live hog price ratio, which could make U.S. pork more competitive despite flat Chinese prices. However, the ratio of U.S.-to-European prices could be a more important metric for determining trade market shares. Imports remain difficult to predict due to current high-season congestion at south China ports and indications that first-half trade could be sluggish.

On the domestic production side, China’s pig industry is experiencing a flattening of its epidemic-driven three year production cycle. After operating slightly in the black in 2013, the average producer endured a significant full-year loss in 2014 of 162 RMB per head (about $26, based on an average weight of 110 kilograms), though conditions turned slightly profitable in the second half of the year. Although accurate industry data is elusive, the 2014 financial performance of several of China’s most efficient, publicly listed, large-scale producers suggest an overall industry malaise. As of mid-January, the closely watched live hog- to-corn price ratio was approximately 5.5:1, the lowest January figure in several years and well below the estimated breakeven level of 6:1.

Industry optimism for a turnaround is driven by official statistics showing a 7 million head decline in the sow herd – from its 2012 peak of 50.78 million to the current reported level of 43.67 million.

“Based on my interviews with industry players, some are not sure the sow cull numbers have been as aggressive as reported,” explained USMEF-Beijing Director Jianwen Liu. “Moreover, less backyard production means increased overall industry productivity, including heavier average slaughter weights and a higher pigs-per-litter average.”

Liu also noted that the sows currently being liquidated are China’s least productive. China’s Ministry of Agriculture released figures for the first half of 2014 showing a year-over-year production increase of 3 percent. This comes on the heels of a 2.8 percent increase in output in 2013, to approximately 54.8 million metric tons (mt). USDA estimates show China’s production expanding steadily since 2011, including 2.8 percent annual increases in both 2013 and 2014. USDA forecasts a 1.5 percent increase in 2015, which would raise production to a record 57.35 million mt.

Analysts have cited official production numbers for the first three quarters of 2014 showing a year-over-year decline in total feed output, the first in several years, as an indication of industry contraction. China feed industry representatives have recently questioned this statistic, noting that not all feed produced by vertically integrated facilities – which are now increasing in number – has been incorporated into production estimates.

“There are some estimates that commercial feed utilization by China’s hog sector actually increased by double digits in 2014, with feed for ruminants also increasing,” Liu explained.

Avian influenza in the first half of 2014 and typhoon-related impacts led to a decline in feed utilization by China’s poultry and aquaculture sectors, according to experts. And although China’s 2014 corn harvest declined for the first time in five years (down just 1 percent to 222 million mt), imports of soybeans and sorghum increased in 2014, as did shipments of DDGs. USDA estimates that China’s soybean imports in the 2013-2014 marketing year increased 17.5 percent and will increase another 5 percent in the 2014-2015 marketing year (to 74 million mt). China’s imports of coarse grains (corn, sorghum, barley, etc.) more than doubled in 2013-2014 (to 12.45 million mt) and are expected to moderate slightly in 2014-2015, based on USDA estimates. China’s DDG imports from the United States reached 5.4 million mt in January-November 2014, up 55 percent year-over-year (Global Trade Atlas data).

Despite current losses, a recent private survey of producers’ intentions reveals that 58 percent of pig farms in major producing provinces have decided to maintain their production scale in 2015, while 17 percent plan to increase production and 24 percent plan to downsize. Almost no farms said they plan to exit the industry, despite a poor financial outlook.

Swine disease outbreaks have not significantly impacted China’s production in recent months, leading many to conclude that any reduction in supply linked to the smaller breeding herd may not materialize until the second half of 2015. The lunar New Year holiday falls late this year, meaning that the seasonal post-holiday slowdown in the market could extend well into May. Other factors weighing on the market include a logjam of imported pork and poultry containers in south China ports, plus an increase in frozen domestic pork stocks. Total pork and pork variety meat imports into China (including Hong Kong) in November 2014 were down 1 percent, bringing shipments for the first 11 months of last year to 1.6 million tons, 3 percent below the 2013 pace.

“Given China’s increase in domestic production and low domestic prices, imports stayed at a relatively high level last year,” said Joel Haggard, USMEF senior vice president for the Asia Pacific. “But this mainly reflected an increase from the EU, assisted by Europe’s cheap and abundant pork supplies and unimpeded market access. Growth from Europe nearly offset smaller volumes from the U.S., Canada and Brazil.”

On the demand side, a softening economy and China’s aggressive anti-corruption campaign have affected consumption, especially at high-end foodservice outlets. But the impact on overall pork consumption is difficult to ascertain, because high-end establishments generally focus on more expensive proteins such as beef and seafood. Official data on total foodservice receipts (see chart below) shows a sharp decline in the year-over-year growth rate in late 2012, which pre-dates both the news of an economic slowdown and the anti-extravagance movement. However, banqueting by government officials has waned at all levels, and a less visible campaign against food waste, especially at larger, state-owned enterprises, has trimmed portion sizes.