One word repeatedly used to describe China is change. Mark Lyons, Alltech global vice president and head of greater China, says “China is changing as fast as it ever has even though the economic growth might not be as fast.” Yet, China swine business is a global opportunity.
Lyons, speaking at the Alltech One Conference, outlines key economic conditions presently occurring in China. Living in the country, he provides an inside viewpoint.
As result of transformation taking place, the economic growth is slow. In general, the nation is restructuring and addressing anti-trust corruption.
Lyons explains the four major trends presented by Premier Li Keqiang: self-sufficient, quality improvements, scale and environmental protection.
First, China will continue its policy to have enough food to feed its citizen. However, Lyons proposes in which way and this alone could lead to vast modification for the food industry.
Furthermore, he adds that China is focusing on food quality. The country has enough food, but now they need better food. This also goes hand-in-hand with China’s refocus on larger farms. It is the government’s viewpoint that larger farms are easier to manage, especially environmental measures.
Noteworthy, environmental protection is becoming a center of focus for agriculture. Lyon says, “This is really something that is changing behavior. It is changing what industry is doing. It is changing what agriculture is doing. There are lots of farms being closed for environmental reasons.”
China pork market collapse
Currently, China’s pork industry is undergoing a vast change in itself. As the largest producer of pork, the data showing dramatic dispersing of sows has not gone unspoken or unnoticed. Lyons says, “We often refer to China as having half of the pigs in the world but that is probably not quite true as it was before.”
A collapse in China’s pork market has occurred.
“It is shocking to see how quickly it is happening,” says Aidan Connolly, Alltech chief innovation officer and vice president of corporate accounts. “When I first started going there 3.5 years ago, they had over 51 million sows. They are now down to approximately 36.5 million sows. Most of that decline happened in the last 18 months. They are specifically focused on the backyard herds where they think they have most of their food safety and disease issues.”
To keep it in perspective, Rabobank states in its quarterly pig report for the first quarter of 2016 that the declines of nearly 100 million head in Chinese hog inventory and nearly 15 million head in its breeding herd is equivalent to the U.S., Canada and Mexico pork sectors all disappearing from the global supply in less than two years.
Presently, China’s sow herd stands at 37.63 million and 10% of the hog farms are classified as large. These large farms only have 1.5 million sows, illustrating that consolidation has not yet occurred but is still to come.
Recently, Connolly visited China and interacted with Chinese hog producers. He says individuals in the Chinese swine business are very positive about their future, reporting gains in production with improvement in pigs per sow per year from 13 to 17.5, and better producers are now reaching 25-26.
He further explains, “Overall pork production is not down that much. So what that tells me is when you reduce your sow numbers by 20-25% and pork production is down by 7% then the conclusion is obviously the ones left behind are getting bigger and more productive. There is no doubt that is happening.”
In his presentation, Lyons explains that the improvement in pigs per sow per year from low teens to 27 means China needs only 27 million sows, which requires less feed and water.
Lyons says the pork market outlook for China is positive as pork prices are expected to remain high. While the government released frozen pork reserves to curb the rising prices, hog prices are still at a high level.
Feed costs have decreased for Chinese pig farmers. In February, feed costs were 16% lower than the previous year but the total production costs for finishing hogs is 4% higher.
Still, China’s change in grain storage policy will have a large impact on livestock production. The country will no longer store large stockpiles of grain. Previously, the large stockpiles contained grain from several past years’ harvest. Presently, very old grain is being released into the supply chain, causing some heartburn for livestock producers. However, in the long term Lyons thinks this is a good step because the storage conditions were inadequate and the stockpiles were too large. This will also trigger an increase in feedstuffs imports.
Largely, Lyons says, “This should be the most lucrative year for pig farmers in the past 30 years.”
At the same time individuals raising pigs in the backyard are exiting, small producers are hesitant to expand. The vast fluctuation in China’s pig prices are making them weary to continue in the business. Yet, the integrators are aggressively investing in the Chinese pork industry. Moreover, larger feed companies are building their own farms and starting to become integrators.
In spite of that, the Chinese pork industry will face challenges.
As environmental concerns come to the forefront, so are regulations. Every year around 1.8 billion tons of manure is produced by Chinese animal agriculture and pig manure accounts for one-third. The government is implementing new regulations including taxing water use and restricting development.
Lyons says, “as you can see water is going to be very big on the agenda.” The government is focusing on the large amount of water it takes to raise pigs in China. The adjustment in regulations will most likely spark pork imports.
Other key pork producing countries will give China a run for their money. International competitors, like the United States, overall have better efficiency, pig reproduction performance and labor productivity. Automation is one area that the Chinese will embrace heavily, explains Lyons.
Looking into the future, Lyons says the top 23 producers will mostly grow over the next five years. The Key 100 National Breeding Farms (MOA) will likely build new farms, especially boar studs. The government will support allocating large land areas and balancing manure handling as the large farms grow.
Addressing antimicrobial-resistant bacteria
The China government is currently addressing ways to reduce antibiotic-resistant bacteria.
Connolly says “The Chinese government has become very concerned with reports of colistin-resistant bacteria occurring in pigs and other livestock, and subsequently being traced to humans.”
A paper published last year in a prestigious journal led to international pressure regarding restrictions on the use of colistin in animals, primarily as a growth promotant.
He says, “The Chinese government is acting on this at the moment, and we have seen resistant bacteria now being discovered in two people in the United States as well. They are addressing the overall issue of antibiotic use and have restricted the list of drugs that can be used as growth promotants.”
This list encompasses about 35 compounds but a further can be used on the farm. Connolly further explains “Clearly, there is a new sense of urgency with respect to this issue. Undoubtedly, this will lead to new actions and/or legislation to address what is a growing global concern.”
Chinese pork demand
According to Xinhua News, 64% of the meat consumed in Chinese households is pork. Regulations and good prices will fuel pork imports. However, Lyons warns that no country can produce enough pork to put a dent in Chinese pork production, limiting pork imports eventually.
Still, a shift in Chinese consumer preference can open the market gateway for U.S. pork. By 2020, Chinese consumption is anticipated to increase by $2.3 trillion even with the slower economic growth. In China, e-commerce will account for 42% of all growth in Chinese consumption over the next five years.
Although food safety is leading consumer concern, other consumer preferences are emerging. Equally desiring is higher quality at acceptable prices with an array of choices. Nutritional wholesome, taste, convenience and how food is produced are now all considerations when the Chinese select food.
Even so, the Chinese food marketplace will remain complex. For lower income households, meat is still a luxury item. However, Lyons reports the consumer would rather spend money on pork to consume two to three times a week versus chicken four or five times. Signaling as income rises; the consumer will mostly likely spend disposable income on pork and other meat products. Lyons says, “This very strong preference for pork is deeply rooted in the culture.”