A breeder feeds piglets at a pig farm in Bijie, China's Guizhou Province, on May 13, 2020.
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BEIJING – Massive fluctuations in pig prices over the past two years are causing turmoil in China's pig farming industry.
To capitalize on a doubling in prices in 2019, the top five pork producers were trying to expand rapidly, increasing their gross debt nearly triple in 2.5 years, S&P Global Ratings said in a report on Wednesday.
But pork prices have fallen as quickly as they have risen, putting pressure on now indebted producers. The consumer price index released on Thursday showed that prices for the Chinese staple food fell 44.9% year over year in August.
An African swine fever outbreak that began in 2018 quickly decimated China's swine production by about 40%, according to Flora Chang, associate director at S&P Global Ratings and author of the report.
“The high price has attracted large pork producers to produce more. … They aggressively borrowed to fund expansion, "she said, noting that funding was readily available due to the coronavirus pandemic in 2020.
Entrepreneurs and companies also hastily made use of government subsidies. Zhejiang Province promised 1,500 yuan, or US $ 231, for each breeding sow.
Three years later, this led to a glut of supply. According to the Department of Agriculture's wholesale price data, pork prices have fallen to around 20 yuan per kilogram ($ 1.40 per pound), around the level of early 2019. At their peak in late 2019 and early 2020, pork prices were close to 50 yuan per kilogram or more, as the data showed.
The unprecedented volatility in prices has hampered pig producers' efforts to finance the growth potential.
With limited "predictability according to price forecasts," the S&P report found how companies suddenly carried extremely high debts. The analysts said that pig producer Wens Foodstuff will be in the 12 months ending Jan.
However, the report found that Muyuan was less affected by African swine fever and its debt level rose only slightly from 1 to 1.3 times in the 12 months to the end of June.
Government efforts to stabilize prices
Pork is a major part of the Chinese diet and the government has worked to ensure adequate supplies by releasing the meat from national reserves when there is a shortage and, more recently, encouraging consumption to counteract oversupply.
"Lately, (pork) prices have been falling very quickly, and (we) hope that everyone can take this opportunity to eat more pork and buy more pork," said Ma Youxiang, deputy minister of the Ministry of Agriculture and Meat rural affairs, at a press conference on September 1st. That comes from a CNBC translation of the Chinese statement.
The tone was different in 2019 when authorities spoke of encouraging production not only of pork but also of poultry and beef in order to stabilize prices.
Stock investors also poured in, sending stocks of big pig producers like New Hope soaring 174% in 2019. But after an additional 16% gain last year, the stock has fallen more than 45% year-to-date.
"The decline in pork prices is having a direct impact on corporate profits," said Bai Xubo, New Hope securities affairs agent, remains weak.
That comes from a CNBC translation of a Chinese statement on Thursday.
Bai remained confident about the foundation of the company's core business, saying that the real competitive advantage comes from efforts to improve efficiency. New Hope can also hedge against price fluctuations with pork futures and business developments in slaughter and processing.
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It takes about nine to ten months to raise a pig from gestation to sale, said Chang of S&P.
This is time for smaller farmers to come into the market when pork prices go up.
In fact, the almost non-existent barrier to entry into the pig industry in China has resulted in price volatility of around 10 to 20 yuan every few years as farmers try to tolerate price changes, Chang said. "Now with (African Swine Fever) and rising environmental standards, you may see higher barriers to entry."
Analysts expect the top 5 producers' market share likely to rise to more than 15%, up from 10.5% in June and compared to 30% of the top 5 players in the US.