The leading global producer and consumer of pork, China is currently undergoing an evolution that should have all pig farmers sitting up and taking notice. As a historical change driven by government, the transition could reshape the global pork industry.
Here are five game changers happening right now in the China pork industry.
1. Government intervention
In China, government policy controls the direction of its agriculture industry and the pork industry will never escape the authority regime. The rhyme or reason of the Chinese government’s focus on food policy always keeps market participants guessing.
In recent years, the China government is shifting toward developing a market-oriented system by interfering less in supply-and-demand fundamentals. As Rabobank Food & Agribusiness report on the China pork industry explains, “While there is less intervention with respect to volatility, it will be increasing efforts to upgrade the pork supply chain and achieve sustainability.”
The Chinese government emphasis will now be on modernization and industrialization of the pork sector while enforcing strict implementation of environmental policies to address the country’s land and water pollution issues.
2. Major culls, consolidation and floods
As the National Hog Farmer team and market experts have reported, China has culled sows to the tune of 15 million head in last two years. The shift in government policy was a big reason for the destocking 2014 and 2015. Small backyard hog farmers simply could not compete (nor economically encouraged to do so) and middle sized farms were forced to also shut down in the wake of strict standards of waste treatment.
While it is believed that China’s sow inventory hit rock bottom in early 2016, pork production is currently in a down cycle. Rabobank expects the sow inventory to rebound in the last two quarters in 2016 and turn a stronger corner in 2017.
Nevertheless, the Chinese swine business will look different after these historical changes. There is plenty room for consolidation with only the top 10 pork producers accounting for 5% of the total Chinese pork supply. In the goal to make China’s pork business more sustainable, the government will heavily support the continuation of consolidation. Compared to backyard pork production, larger farms capitalizing on modern practices, refine genetics, equipment and facilities could net a huge efficient gain for the industry while at the same time requiring fewer sows.
Adding to the production woes, five provinces, responsible for producing one-third of the pork in China, have been hit hard by flood. The National Bureau of Statistics reports that more than 10,000 hogs drowned in the village in Hubei province while 5,000 more were stranded nearby. In addition, the high number of dead pigs, the abundance of floodwaters and humid temperatures creates a perfect storm for disease outbreak, forcing many hog farmers to sell pigs way below market weights.
3. Record prices
After the Chinese Spring Festival of 2016, pork prices soared to fresh new highs. In first quarter of 2016, pork prices climbed more than 30% with piglet prices more than doubling year-over-year, reports Rabobank. Obviously, a dramatic decline in the country’s hog inventory triggers higher pork prices.
Despite the fact that cash hog, pork and weaned pigs prices have all increased, they have all moved at different rates. According to Rabobank, this signals three noteworthy items:
- Steep piglet prices indicate low supply of weaned pigs for market and breeding purposes. If farmers retain more gilts for breeding then the supply is going to get tighter.
- Slower growth in pork prices means pork demand is softened.
- A sluggish growth in pork prices in comparison to hog prices also says processors are having a tough time passing on the higher prices to consumers.
4. Quality corn in short supply
In March, the Chinese government announced it will stop stockpiling corn and allow the market to set the price of corn. Similar to its support of the hog sector, it economically encouraged Chinese farmers to grow corn, leading to large overstock of corn.
As result of the reverse China’s expensive agricultural subsidy program, large amounts of corn was released into the marketplace this year. However, market analysts estimate more than 20 million metric tons of China’s corn is so moldy and deteriorated, making it unfit for human and livestock consumption.
In a recently released report, the USDA’s Beijing bureau says some corn may be used for ethanol while some is deemed worthless. In 2017, the USDA estimates China’s total corn stocks will drop to 103.4 million tons, down six million tons. The USDA forecast that China will produce 218 million tons of corn in the crop year that runs from July 2016 to June 2017, decreasing 224.6 million tons in 2015-16. Furthermore, corn imports are expected to fall to one million tons, from 2.5 million tons in 2015-16.
Still, in the short-term livestock producers are scrambling for affordable, quality feedstuffs until the new crop is harvested. China’s corn imports in April and May reached record levels, pushing input costs higher.
5. Who will fill the supply gap?
Despite the fact that the Chinese are consuming 4% less pork this year, Rabobank estimates the supply gap for pork will reach 2 million tons which means the country will need to import an additional 30%. Moreover, Rabobank says beyond 2016, “China will likely maintain a similar level of imports even when local production recovers in 2017.”
Since China’s pork prices are nearly double than competing countries, pork imports are already flowing in steady. Yet, the European Union will persist as the main exporter of pork and variety meat to China. Rabobank says the EU will export an estimated 1.4 million tons of pork and variety meat (70% of imports) to China this year.
Although the United States has increased its pork exports to China by 363,000 tons, the lack of ineligible U.S. plants has hindered the United States from capturing more of the market. Canada is in the most favorable position to increase its trade with China with one of the largest supplies of ractopamine-free pork coupled with a decline in its currency.
There is no getting around it. China holds the key to the global pork market. Even though pork imports to China only account for 3.5% of the supply, those purchasing imported pork will keep coming back if the product is great quality, affordable and safe — all proven qualities of U.S. pork. So, now seems to be the time for U.S. processors and those American pig farmers with their eye on the global marketplace to seize the opportunity presented before them.