Understanding the Hog Price Cycle
China’s hog price generally follows a boom-and-bust cycle that lasts 4-5 years. In the past four cycles, hog price moved within 10-20 yuan per kg range, until African Swine Fever hit in August 2018. Hog price shot up to 40 yuan in 2019 and stayed above 30 throughout 2020.
Downtrend of the current cycle started in February 2021, as supply recovered while demand was weak. Hog price fell as sharply as the earlier rise. Cash hog price was 11.83 as of March 22, effectively dropping back to the lower end of the previous price cycles.
Hog price is determined by the supply and demand relationship. The 2019 price hike was driven by supply depletion due to ASF, while meat demand remained normal. In 2020-21, hog supply gradually recovered, but pork consumption was suppressed by COVID related losses of social activities and consumer income.
Extreme Measures to Combat COVID Depress Consumption
Since 2020, China implemented strict “Zero Covid” policy nationwide. All citizens must carry a colored Health Code on their cellphone. “Yellow” means home quarantine. “Red” calls for weeks of detention in government facility. Without “Green Code”, you are denied entrance to all public space. Weekly Covid testing is the new norm.
Cities with positive Covid cases could face lockdown. Wuhan, capital of Hubei Province with 11 million people, was closed for 74 days when Covid broke out on January 25, 2020. The lockdown was thorough – all businesses were shut down. Residents were home bound. Nobody went in Wuhan and nobody got out. The entire city was coded Red.
During Spring Festival in February 2021, Government issued travel ban restricting hundred million migrant workers from going home. Without family reunions, banquets and gift buying, pork price saw unseasonal decline during the biggest sales month of the year.
The Omicron variant hit China last December. Xi’an, city of 13 million, was locked down for a whole month. The latest wave of Covid outbreaks now spreads all over China, including Shanghai, the largest city with 26 million people, and Shenzhen, population 17 million, where iPhones are assembled locally and distributed globally.
In the third year of fighting COVID, strict policy continues to affect retail industry, restaurants, travel, employment and consumer income. As of this writing, Shanghai is under complete lockdown until mid-April. Zero-COVID policy is unlikely to be abandoned any time soon.
The Phenomenon of Publicly Listed Hog Firms
There are 40 publicly traded companies in the Chinese hog industry, covering hog production, feed production, meatpacking, and animal health sectors. Many firms switched main business to hog production during 2019 and 2020 when both hog price and stock price are high. Cash-rich big firms went on to a buildup spree to get bigger.
Publicly traded hog firms now account for 20% of China’s total hog production, up from about 5% just five years ago.
A public listing enables a firm to raise capital easily and cheaply. It could issue new stocks or debts. Banks are willing to lend money at ultra-low rate as company stock can be pledged as collateral. Large publicly traded hog firms are new phenomenon not only in China, but in the global hog industry as well. We have witnessed their All-In expansion with completely no regards to hog price and hog margin.
Why Large Hog Firms Are Not Downsizing
Many firms are halfway through 5-year expansion plan. While fewer new plants are being built amid free falling hog price, liquidation from existing ones would be bad. It signals failed strategy and would cost Management their jobs as well as a crash of company stock price.
Big hog firms raised large sum to expand. They must continue to produce hogs to service debt. Each has numerous public partnerships with local government in the form of free land and tax break, which obligates them to build farms, create jobs, and generate revenue. Low hog price does not release them of fulfilling such obligations.
Even though big hog firms are deeply in the red, investors expect them to hold on to their hog plants. Mainstream thinking: Hog cycle dictates that price will rise once again. And when it does, they would make up for the past losses with a bigger production. February hog sales data validates the continuous growth from large producers.
Overall, we expect China’s hog price to remain low throughout 2022. Ample sow stock and weak consumption mean that future hog supply will be large relative to pork demand. Even if liquidation occurs, it may not be adequate to bring hog price up to the 20-yuan level.
This is what the futures market predicts as of March 22.
This is bad news for European and American pork exporters. China’s need for meat import will be low this year, and there isn’t any price differential to make the international trade profitable.
However, I’m very bullish on corn and soybean. With a large herd of livestock to feed, China’s appetite will be huge. The Russia-Ukraine War would create food shortage and send grain prices much higher.
Jim W. Huang, CFA
Mobile: 630-698-1290
Email: jimwenhuang@gmail.com
