Sizzling sales

Shortage of sows boosts pork prices

Pig w

It’s regularly voted the most romantic movie of all time and in Casablanca many declarations of love take place over a glass of champagne. Rick and Ilsa are drinking it when Rick says, “Here’s looking at you kid” and likewise when Sam plays As Time Goes By at a bar in Montmartre.

In China such declarations have recently involved the joint consumption of pork. Or that’s according to netizens who’ve been joking about the high cost of porcine products. “If you’re eating pork that definitely means you love each other,” says one social media user.

Pig farmers are enjoying a dramatic surge in pork prices. In the space of a year, costs per kilo have risen from about Rmb17 ($2.62) to Rmb25.67 (as of this month). That’s still below the record prices of Rmb35 in 2011, but what’s taken the industry by surprise is the sheer speed of the increase.

Forget bull markets – China is “enjoying the beginnings of a pig market,” a private equity investor from Beijing tells China Securities Journal. Hot money is flowing into pig-related stocks and the country’s largest producer and supplier, Hong Kong-listed WH Group, has witnessed a 36% rise in its shares so far this year. The sizzle in pork prices is coming from a shortage of breeding sows, which hit a record low in February.

Where have the sows gone? The Porcine Epidemic Diarrhea virus killed some. Likewise persistently low prices in previous years saw a general culling in 2015. And while the government is struggling to contain overcapacity in sectors like steel and cement, it seems to have been more successful in consolidating the fragmented pig industry, where many small farmers have given up.

The consolidation process was hastened by food quality concerns, as well as environmental regulations targeting water pollution in 10 provinces which came into effect last November. China Daily says pig numbers have been reduced by 20 million since then.

Experts say profitability for those still farming pigs has tripled in the space of a year. That’s because grain prices in China have been steady, taking the industry far beyond the pig-to-grain price multiple of six that farmers are said to need to break-even. In fact the ratio has climbed to more than nine times, prompting warnings about the inflationary impact (pork can account for up to 3% of the CPI basket).

Others doubt that the high returns will last. At a recent investor day WH Group said prices will start to fall during the second half because farmers have been holding pigs back from market to push prices up further. Supply may increase in other ways: better genetics mean that sows are having more piglets and hoggeries have announced expansion plans for their production facilities.

All the same, futures in the $8 billion hog market on the Chicago Mercantile Exchange have surged 12% and analysts are forecasting that WH Group will increase imports from 160,000 tonnes of pork in 2015 to 260,000 in 2016. Pork exports from Europe – the largest vendor to China in volume terms – raced up 78% in January from a year earlier.

One firm yet to benefit is China’s second largest pork supplier Yurun Foods. Its founder, Zhu Yicai, is currently under house arrest according to China Business Journal. Vice chairman Hu Xiaojun has also been under investigation since last August. That same month a Yurun subsidiary said it was unable to meet an Rmb100 million obligation (reportedly bondholders were offered sausages instead of cash). Then in early autumn another subsidiary also said it was in trouble, and unable to redeem an Rmb1.3 billion note. China Business Journal says Sunac chief executive Sun Hongbin is believed to have stepped in to pay the outstanding amount, as he was interested in taking over the company. The Tianjin-based property developer signed a preliminary deal last September, but pulled out 10 days later saying it was unable to complete all the documentation in time.

Now Yurun has announced it cannot repay another Rmb1 billion bond (due in May). Some of the reasons for its downfall sound familiar. Instead of investing further in its core business, the company diversified into real estate – specifically commercial property in third tier cities where its landbank is based. But the diversification hasn’t gone to plan and this little piggy now appears to be well on its way to market – but of the M&A variety. n

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