China hog stocks shed $75bn after swine fever recovery and ‘peak pork’

Agricultural commodities updates

A resurgence of pork supplies in China following huge losses from African swine fever has wiped about $75bn off the country’s top hog-related equities, as the world’s largest pig farmers grapple with the possibility that Chinese consumers have passed “peak pork”.

The fall in the market capitalisation of large pork and feed stocks from a peak in February, according to a Financial Times analysis based on Bloomberg data, comes as Chinese hog futures have dropped more than 50 per cent since they began trading earlier this year.

Officials say that China has fully recovered from the impact of African swine fever, which first arrived in the country in August 2018. New outbreaks of the disease have continued to disrupt farms nationwide, according to analysts, but supplies have risen substantially after it effectively halved the size of China’s hog herd in 2019.

Wholesale prices for pork have dropped about 54 per cent to Rmb20.17 ($3.120) per kilogramme, roughly where they were before the swine fever pandemic reached China. But reports from local markets say demand has not returned to previous levels, which suggests that many Chinese consumers have permanently switched to other proteins.

“We’ve entered a period of structurally lower demand. We had years where [pork] prices were high and people switched to beef, chicken or fish,” said Darin Friedrichs, an analyst at Shanghai-based StoneX. “It definitely seems like we’ve reached peak pork in terms of China’s consumption.”

Hog prices initially fell after the pathogen’s emergence as Chinese farmers slaughtered and sold their animals at any sign of contamination, in an attempt to avoid a near-total loss of revenue if officials culled their herds.

But a year after the first cases appeared in China, hog prices began to shoot higher, with many of the smaller farms that produce most of the country’s hogs running out of pigs to slaughter as the disease made raising new piglets too risky.

Shares in many listed pork producers such as Muyuan soared in 2020 as investors bet that larger outfits would be better positioned to enforce biosecurity measures necessary to prevent further outbreaks.

But as pork stocks have risen, margins for most hog farmers have fallen. That has delivered a punishing rout for the likes of Muyuan, whose market value has more than halved from its peak in March, as well as feed businesses such as New Hope Liuhe, which also has hog farming operations.

Line chart of Wholesale spot price for pork (Rmb/kg) showing Pork prices plummet in China

Liu Chang, the chair of New Hope, even issued an open letter of apology last month after the company reported its first estimated loss in years. In the letter, Liu blamed the Covid-19 pandemic, swine fever and weak consumer demand, adding that “this is not only a new difficulty for the company, but a test for the entire industry”.

But Friedrichs at StoneX said the industry’s dynamics had changed. Where once price falls might drive down production by small farmers, ultimately resulting in a rebound because of constrained supply, now he expected the biggest hog farmers to continue dialling up production in the fight for dominance over the world’s largest protein market.

“The larger firms have all these advantages in terms of capital costs, subsidies from the government, equity issuance, and that’s really going to accelerate the shift away from these small farms,” Friedrichs said.

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