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02

2022

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12

Review of Chinese Pig Market in Recent 2 Years

Source:

OIG+X

After the Spring Festival in 2021, the price of live pigs was sluggish. After entering the second quarter, with the continuous overcapacity, the price of live pigs showed an upward trend.

The review in 4 quarters:

 

After the Spring Festival in 2021, the price of live pigs was sluggish. After entering the second quarter, with the continuous overcapacity, the price of live pigs showed an upward trend.

 

The pig price in the first quarter was low. After the Spring Festival, since it was in the traditional low consumption season, and the production capacity at the early stage had not been digested. Despite the boost of state reserve, the overall situation of oversupply did not change, and the pig price fluctuated at about 12 yuan/kg.

 

Supply and demand gradually tightened in the second quarter. After entering the second quarter, as the sows' capacity reduction began in July 2021, the market pig supply gradually tightened, driving the pig price up. The price of live pigs rose from about 12 yuan/kg in late April to 23 yuan/kg in early July.

 

The pattern of tightening supply and demand in the third quarter remains unchanged. The third quarter was still in the stage of capacity reduction. While the supply pressure fell, the pressure on pig average weight, imports and frozen products was relatively weak. At the same time, driven by the rise of other meat prices, the pig prices were still the main actors. Although the policy regulation such as interview and stock dumping had been made frequently when the pig price increased fast, to some extent, it has curbed the irrational behavior of the market, but under the overall tight supply pattern, the pig price had not fallen below 21 yuan/kg, and the pig price has strengthened again around the festivals.

 

In the fourth quarter, the pig price was under pressure. After the National Day, with the sudden drop in temperature, pork consumption was expected to increase, the sentiment of reluctant to sell and secondary fattening was strengthened, and the supply of live pigs was gradually reduced, driving the pig price to a high of 28 yuan/kg. However, the high price of pork restrained consumer demand, and the slaughtering enterprises were in deep losses, resulting in limited capacity to undertake terminal consumption. Under the guidance of government’s control, the pig price fell back from the pressure in late October. At the end of the year, the breeding rate of sow structure optimization, the behavior of reluctant to sell and secondary fattening, as well as pork supply will still increase month on month. The demand side ushers in the year-end consumption peak season, and the pig price was fluctuated at a high level.

 

(1) Review of "Pig Cycle"

From the perspective of "pig cycle", in October 2021, the average price of domestic pigs dropped to a low of 10.8 yuan/kg, which also means the end of the previous cycle. Then, with the arrival of the peak consumption season in the fourth quarter of 2021, the price of live pigs rebounded to 18 yuan/kg, and fell back to about 12 yuan/kg after the Spring Festival, but it did not break the low point in October.

 

From April 2022, with the reduction of the pig production capacity, the pig price entered a relatively smooth upward stage, reached a high of 28.6 yuan/kg by October 20. This price was basically the same as the previous peak of this cycle, the second highest level only after the ASF cycle.

 

From the perspective of the upward driving factors of the cycle, the driving factors of the previous "pig cycle" were mostly intervened by external factors such as epidemic and regulation, resulting in a significant reduction of sow production capacity. Such as blue ear disease in 2006, foot and mouth disease and pig diarrhea in 2010, capacity reduction and environmental protection in 2014, and ASF in 2018. However, this round of pig cycle was different, mainly due to the deep loss at the breeding end and the lack of external interference. Therefore, it was characterized by early resumption of production and short upward cycle.

 

(2) Supply side

Basic production capacity: the environment for resumption of production was good, and the action of increase the herd started earlier. In the past cycle, when the self breeding model could fully cover the previous losses and the industry's net profit could reach the level of about 7 billion yuan per month, a large range of sows would be added.

 

This cycle was different. According to the calculation, if the pig price in the fourth quarter reaches about 25 yuan/kg, the margin of profit accumulation can reach the level of the industry's general level. However, the actual situation is that the herd had started to increase in May 2022, which means that self breeding had not yet achieved profits. The main reason for this phenomenon was that after the ASF period, a large amount of funds were attracted to the breeding end, which led to a relatively sufficient number of pigs in this cycle, which was conducive to the number of sows; second, this cycle lacked large-scale epidemic interference and policy capacity constraints, and the sows were subject to less resistance in the process of replenishment.

 

According to the statistics of the MARA, from May 2022, the number of breeding sows on hand had continued to increase on a month on month basis. By the end of the third quarter, the number of breeding sows on hand nationwide reached 43.62 million, and the process of replenishment was still in progress.

 

According to the pig growth cycle, from March 2023, the number of pigs sold will start to increase month on month, while the number of sows keep growing in the near future. If external interference is eliminated, it is expected that the growth trend of the number of pigs sold will continue until the second half of 2023.

 

However, from the perspective of the pace of herd supplement, although this round of resumption of production was ahead of schedule, the rate of resumption of production was relatively slow in the second and third quarters, mainly due to limited initial funds and high breeding costs. In the fourth quarter, with the improvement of enterprise profits and capital, the rate of sow supplement may accelerate. This will also lead to the realization of pig breeding industry capacity in 2023 with the characteristics of "slow at the early stage and fast in the later stage".

 

The structure of sows was optimized, and the production performance was greatly improved. Since June 2021, the structure of breeding sows has been continuously optimized. By 2022, the proportion of sows on hand has risen to more than 85%. Therefore, in the fourth quarter of 2022 and the final stage of the realization of the annual sows' capacity reduction in 2023, there will be a decrease in the number of pigs and an increase in the pork supply.

 

The decrease of imported frozen products makes it difficult to form supply pressure. Since 2022, China's monthly pork import volume has basically remained at about 130,000~150,000 tons, which is at a historical low level. It is estimated that with the continuous recovery of domestic production capacity in 2023, there will be no significant increase in imports.

 

From the perspective of frozen product inventory, since the second quarter of 2022, with the rapid rise of pork prices and the rise of frozen product storage costs, the frozen product storage capacity rate is currently at a low level and is constantly releasing. In 2023, despite the gradual downward transition of the cycle, it is still in the decreasing phase, limiting the enthusiasm of slaughter enterprises to build warehouses. Therefore, it is difficult to form supply pressure for frozen products.

 

Breeding profit: gross profit rate was high, and the cycle moves towards the stage of net wealth accumulation. Affected by the continuous rise in feed prices, the cost of pig breeding was also increasing. At present, the cost of self breeding and self rearing was 17.10 yuan/kg, an increase of 11% compared with 15.41 yuan/kg at the beginning of the year, and the cost of breeding piglets by outsourcing was 18.93 yuan/kg, an increase of 20% compared with 15.75 yuan/kg at the beginning of the year.

 

The rise in breeding costs squeezed the profit space, but also provided cost support for the rise in pig prices. Although the recent price of live pigs continued to fall, the current average profit and gross profit margin were still high, only second to the ASF level. As the industry in the fourth quarter transits to the stage of net wealth accumulation, cash flow will continue to improve, or drive the enthusiasm of increase the number of sows further.

 

(3) The demand side is not optimistic

The consumption was not good, and the impact of the epidemic had not been lifted. On the whole, the epidemic had a great impact on consumption this year. According to the data of the National Bureau of Statistics, in the first half of the year, the total retail sales of consumer goods declined by more than 10% year on year, while the total retail sales of catering products declined by more than 20% year on year. Although it improved in the second half of the year, it was still weak. The prosperity of the catering consumption industry was not good, and the consumption demand for pork was also decreased. With the gradual adjustment of covid-19 policy and control, the market's expectation of consumption recovery has been strengthened, but the recovery of consumption capacity still takes time. It is expected that the terminal pork consumption market will still face considerable pressure in the short term, and may tend to improve in the long term.

 

High prices restrained terminal consumption, and low slaughter profits provided negative feedback. Since the second half of 2022, although the price of live pigs has risen rapidly, slaughtering enterprises have fallen into deep losses, and no significant improvement has been made. In previous years, as winter approached, slaughter enterprises would raise prices in advance to promote revenue and prepare for peak season sales. However, in recent years, the overall operating rate of slaughter enterprises was low, which not only did not increase significantly compared with the first half of the year, but even decreased.

 

At present, the high price pork restrains the terminal consumption, and it is difficult for slaughter enterprises to transfer the pig price to the meat price on consumer side. Under the condition that profits are continuously suppressed, the pig harvesting motivation is weakened, forming a negative feedback from the bottom up. In 2023, high pig prices will lead to reduced demand, and after the Spring Festival, there will be an off-season of consumption. The terminal purchasing power will further decline. It is expected that the profits of slaughter enterprises will still be difficult to grow, and the willingness to harvest pigs will continue to decline.

 

The seasonal consumption characteristics are obvious, and the supply and demand structure will be adjusted next year. Pork consumption has obvious seasonal characteristics. It is estimated that in 2023, the low and peak season characteristics of pork consumption will affect the running rhythm of pig prices in the year. Weak demand in the first half of the year will drive the price down, while more holiday demand in the second half of the year will drive the price up seasonally.