Genesus Global Market Report China, January 2021

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Genesus Global Market Report
China, January 2021

Lyle L. Jones
Director of Sales, Genesus Inc., China

As the world’s largest pig producer and pork consumer, China has ushered in the hog futures trade! On the evening of December 11, the China Securities Regulatory Commission (CSRC) set the launch date of hog futures on January 8, 2021. The Dalian Commodity Exchange released eight documents including the pig futures contract and related rules on Dec 12, 2010, which marked the official launch of the pig futures trade in China.

In 2020, the number of production sows in China has been increasing. According to the Ministry of Agriculture and Rural Affairs, by the end of November, the inventory of live pigs and production sows had recovered to more than 90 % of the annual level. By the end of September, China’s live pig inventory had reached 370 million, returning to 84% at the end of 2017. The inventory of production sows reached 38.22 million, returning to 86% at the end of 2017

China’s slaughter pig price of 33.9 yuan per kg ($2.35/lb.) in mid-December was about the same as the 33.73 yuan/kg one year ago. To put things in perspective, the average slaughter pig price at the same time in 2018 prior to the effect on the market of ASF was 13.55 yuan per kg., or $0.95/lb.

Pork prices hit an average wholesale carcass price in mid-December of 49.82 yuan/kg compared to 50.99 yuan/kg a year ago.

With Chinese New Year and Spring Festival approaching, demand for Pork is expected to increase as it typically does during the holiday season. We are already seeing pig prices increasing in Sichuan to 36.50 yuan/kg., ($2.54/lb.) and Guangdong Province 38 yuan/kg., ($2.90/lb.) as of January 4, 2021.

China Pig Price Chart

To keep pork prices in check, China continues to import record amounts of pork and at the same time release frozen pork reserves. According to a recent announcement, 30,000 tons of frozen pork was auctioned on December 24th. This marks the 37th time since the first of the year with the cumulative volume of frozen pork released 650,000 tons.

High prices are attracting new entrants into the pig business while encouraging expansion by already established companies. The overall investment is amounted to 400 billion RMB ($61.28 billion) in 2020, about 4 times the investment in 2019. The major investors are New Hope, Zhengbang, East Hope and others include Muyuan, Tianbang, Jinjizhining, and Dekang respectively.

There are many commentaries warning about falling hog prices due to overexpansion. We have seen photos of 26 level pig buildings and 80,000 sow farms, as well as read the reports of all the money that has been pouring into the industry. No doubt pig prices will drop, but it is a question of to what level and when. Many factors will be involved, but the Market Price is the key indicator to watch.

What are the factors that will determine when the market returns to normal?

  1. Quality genetics: China’s imported a record 27,000 pigs from overseas 2020 to help resupply its breeding farms with high quality geentics. The previous record was 17,300 heads in 2013.
  2. ASF: Much awareness has been made on biosecurity and disease control as it should be. ASF needs to get under control before the industry can fully recover. Larger companies seem to be better able to manage biosecurity measures and are learning how to live with it.
  3. Modern Facilities: There is a need to upgrade to more modern facilities and get away from older facilities that were not designed nor constructed with bio-security, disease control and ease of management in mind. The huge investment allows for the adoption of new technologies that will play a role in China’s recovery and future sustainability.
  4. Management and Skilled Labor: With the huge expansion, where will all the staffing come from? Large companies have economies of scale and a very supportive government, but also higher fixed costs for facilities and must compete for experienced managers and pay much higher costs for skilled labor. Construction of facilities is the easy part, it is the teaching and training of the people on the farm of proper procedures and consistent application that is always the challenge.

Observation: The rapid expansion in China is pushing costs of production up. Pig feed prices have increased to new record highs at 3.4 yuan/kg ($0.236/lb.) or $472 per ton. Figuring 318kg (700lb) are needed to finish a pig to 126kg (278lb), the feed cost is 1,081 yuan ($165) per pig which is greater than live slaughter pigs are selling for on the Iowa- Minnesota market in the USA.

This all means it’s cheaper to import the pork from abroad than to raise it. China may be importing pork for some time, which is good for those pork producers in Iowa and Minnesota. The sooner producers are able to rollover those lower productivity sows and replace them with higher quality genetics, the faster the recovery may be.