China’s pig farmers struggle as pork prices fluctuate and eliminate debt-fueled expansion plans

BEIJING: Massive changes in pork prices over the past two years are sweeping China’s pig farm industry.

To capitalize on price doubling in 2019, the top five pork producers tried to expand rapidly and increased their gross debt by nearly three in 2.5 years, S&P Global Ratings reported Wednesday.

But pork prices have fallen as fast as they rose, putting pressure on now-indebted producers. The consumer price index released on Thursday showed that Chinese basic meat prices fell 44.9% in August from last year.

An outbreak of African swine fever that began in 2018 quickly reduced China’s pork production by about 40%, according to Flora Chang, associate director of S&P Global Ratings and author of the report.

“The high price attracted large pig producers to produce more … They were aggressively borrowed to fund the expansion,” he said, noting that due to the coronavirus pandemic in 2020, it could finance easily.

Entrepreneurs and businesses also rushed to take advantage of government subsidies. Zhejiang Province pledged 1,500 yuan or $ 231 for each breeding sow.

Three years later, this produced an oversupply. Pork prices have fallen by about 20 yuan per kilogram ($ 1.40 per pound), almost the same level as in early 2019, according to wholesale price data from the Ministry of Agriculture. At its peak in late 2019 and early 2020, pork prices were close to 50 yuan per kilogram or more, the data showed.

Unprecedented price changes have complicated the efforts of pig producers to finance potential growth.

With limited “ability to plan according to price projections,” the S&P report noted how companies were suddenly enduring extremely high debt levels. Analysts said that in the twelve months to June 30, pig producer Wens Foodstuff saw its debt-to-earnings ratio (before interest, taxes, depreciation and amortization) multiply again, with respect to to 1.9 times in 2020.

However, the report noted that Muyuan was less affected by the African swine fever and that its debt leverage increased slightly, to 1.3 times from 1, in the twelve months to end of June.

Pork is a major part of Chinese diets and the government has worked to ensure a sufficient supply by freeing meat from national reserves during shortages and, more recently, encouraging consumption to counteract oversupply.

“Recently [pork] prices have fallen very rapidly and [we] I hope everyone can take this opportunity to eat more pork, buy more pork, “Ma Youxiang, deputy minister of the Ministry of Agriculture and Rural Affairs, told a news conference on September 1. This is according to a CNBC translation of the Chinese Declaration.

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 came in, sending shares of major pig producers like New Hope, which soared 174% in 2019. But after additional gains of 16% last year, shares have fallen more than 45%. during the year.

“Falling pork prices directly affect corporate profits,” said Bai Xubo, a New Hope securities affairs representative, noting that pork supply is expected to remain in surplus, with high levels of imported frozen meat and a backlog in ports while consumer demand remains weak.

According to a CNBC translation of a Chinese statement on Thursday.

Bai remained confident in the core business base of the company and said the real competitive advantage comes from efforts to improve efficiency. New Hope may also use future pigs and commercial developments in slaughter and processing to protect itself from price fluctuations.

It takes about nine to ten months to raise a pig from the sow pregnancy to the sale, Chang said of S&P.

There is time for small farmers to enter the market when pork prices rise.

In fact, the almost non-existent barrier to entry into the pork industry right now in China has created price volatility of about 10 to 20 yuan every few years as farmers try to change prices, Chang said. “Now with [African swine fever] and by raising environmental standards, you may see higher barriers to entry. “

Analysts expect the market share of the top five producers is likely to increase by more than 15%, from 10.5% in June and compared to 30% of the top five US players