China: Hot Summer, Olympics, Slow Pork Consumption Amid Industry Expansion

China: Hot Summer, Olympics, Slow Pork Consumption Amid Industry Expansion

By Joel Haggard, USMEF Senior Vice President, Asia Pacific Region

With hundreds of millions glued to home television sets and factory canteens running on low speed, the normal summer lows of pork consumption are being exacerbated by China’s hosting of the Olympic games. This lull comes as China’s hog herd has expanded close to double-digit levels year on year, with producers responding to strong industry profitability over the past nine months.

Reports from USMEF offices in China point to a negative “Olympic impact” on pork consumption. The effect is more pronounced in Beijing, where tourists have not offset the sharply reduced local customer traffic in many restaurants. Some have even chosen to close for the three-week run of the Olympic games. USMEF-China also notes that urban clean-up campaigns linked to Olympic events have curtailed street-hawker activity. As a result, huge volumes of imported pork and poultry products have stacked up in Chinese cold stores, with some facilities reporting 100 percent capacity. National distribution of imports has also been affected by the Olympics, as increased security on roadways has slowed product movement. Finally, falling domestic prices have narrowed the spread between the wholesale prices for imported pork and local products.  

Domestic boneless fresh pork prices in large urban areas have dropped between 15 percent and 20 percent from the high point reached in February 2008. In late July, China’s ministry of agriculture announced that its total mid-year live hog inventories have increased by more than 9 percent from year-ago levels. More importantly, sow numbers are up 22.5 percent.

With hog numbers surging and consumption weak, hog-raising profitability is dropping quickly. Analysts note that production costs of RMB 14/kg. ($93/cwt) are fast approaching the recent live slaughter hog market price of approximately RMB 14.5/kg. ($96/cwt). Moreover, large stocks of imported pork, plus continued anti-inflationary releases of U.S. pork from the government’s strategic reserves, are adding a bearish tone to the market. A drop in piglet prices over the past week is an indication of the loss of enthusiasm about the near-term outlook for the market. Reports of swine fever and other disease outbreaks are also adding to negative producer sentiment. However, if piglet prices keep falling - along with feed prices, which have also been drifting lower in recent weeks after large jumps earlier in the year - hog production breakevens will drop. This is likely to partially offset the decline in the live hog and pork market.  

The Chinese government has announced significant subsidies for investors in development of large-scale hog farms. Over the past three months, USMEF is aware of at least six major company announcements of intentions to invest in these large-scale farms. Among these announcements are reports of major investments by Goldman Sachs - which already has a stake in China’s two largest meat processors - and Deutsche Bank.

China’s interest in building new farms is also evidenced by a sharp increase in imports of breeding hogs. For the first six months of 2008, China imported almost 4,600 breeding hogs - four times its average pace over the last three years. China hopes large-scale farms can help smooth out the country’s roller-coaster hog market, which sees the quick entry and exit of tens of thousands of producers at different stages of the production cycle.

Although the bullishness of the hog market over the past year may be poised for a reversal, there is a silver lining. China announced yesterday that its consumer price index dropped to a 10- month low of 6.3 percent in July. Last month’s increases in food prices, which account for one-third of China’s inflation index, moderated to 14.4 percent, with meat prices rising 16 percent. Slower inflation of food prices is welcome relief for China’s leaders, who face headwinds with rising raw material and labor costs, slowing exports, and a near collapse of stock prices. The appreciation of China’s currency has stalled over the past month, and analysts are still betting that following the Olympics, China’s leadership will eliminate some of the market intervention measures it imposed on non-food items. 

U.S. pork and pork variety meat exports continued their surge in June, with 54,352 metric tons being shipped to China/Hong Kong – nearly four times the June 2007 total of 14,115 metric tons. As the largest volume destination for U.S. pork exports, China/Hong Kong led worldwide U.S. pork exports to a record-setting first half of 2008. Shipments to China/Hong Kong reached 254,445 metric tons - valued at $439.8 million – during this period. However, South China traders are now stating that because of full cold stores, falling domestic prices, and weak demand, there is margin pressure on new products arriving from the United States.  

China: Hot Summer, Olympics, Slow Pork Consumption Amid Industry Expansion

By Joel Haggard, USMEF Senior Vice President, Asia Pacific Region

With hundreds of millions glued to home television sets and factory canteens running on low speed, the normal summer lows of pork consumption are being exacerbated by China’s hosting of the Olympic games. This lull comes as China’s hog herd has expanded close to double-digit levels year on year, with producers responding to strong industry profitability over the past nine months.

Reports from USMEF offices in China point to a negative “Olympic impact” on pork consumption. The effect is more pronounced in Beijing, where tourists have not offset the sharply reduced local customer traffic in many restaurants. Some have even chosen to close for the three-week run of the Olympic games. USMEF-China also notes that urban clean-up campaigns linked to Olympic events have curtailed street-hawker activity. As a result, huge volumes of imported pork and poultry products have stacked up in Chinese cold stores, with some facilities reporting 100 percent capacity. National distribution of imports has also been affected by the Olympics, as increased security on roadways has slowed product movement. Finally, falling domestic prices have narrowed the spread between the wholesale prices for imported pork and local products.  

Domestic boneless fresh pork prices in large urban areas have dropped between 15 percent and 20 percent from the high point reached in February 2008. In late July, China’s ministry of agriculture announced that its total mid-year live hog inventories have increased by more than 9 percent from year-ago levels. More importantly, sow numbers are up 22.5 percent.

With hog numbers surging and consumption weak, hog-raising profitability is dropping quickly. Analysts note that production costs of RMB 14/kg. ($93/cwt) are fast approaching the recent live slaughter hog market price of approximately RMB 14.5/kg. ($96/cwt). Moreover, large stocks of imported pork, plus continued anti-inflationary releases of U.S. pork from the government’s strategic reserves, are adding a bearish tone to the market. A drop in piglet prices over the past week is an indication of the loss of enthusiasm about the near-term outlook for the market. Reports of swine fever and other disease outbreaks are also adding to negative producer sentiment. However, if piglet prices keep falling - along with feed prices, which have also been drifting lower in recent weeks after large jumps earlier in the year - hog production breakevens will drop. This is likely to partially offset the decline in the live hog and pork market.  

The Chinese government has announced significant subsidies for investors in development of large-scale hog farms. Over the past three months, USMEF is aware of at least six major company announcements of intentions to invest in these large-scale farms. Among these announcements are reports of major investments by Goldman Sachs - which already has a stake in China’s two largest meat processors - and Deutsche Bank.

China’s interest in building new farms is also evidenced by a sharp increase in imports of breeding hogs. For the first six months of 2008, China imported almost 4,600 breeding hogs - four times its average pace over the last three years. China hopes large-scale farms can help smooth out the country’s roller-coaster hog market, which sees the quick entry and exit of tens of thousands of producers at different stages of the production cycle.

Although the bullishness of the hog market over the past year may be poised for a reversal, there is a silver lining. China announced yesterday that its consumer price index dropped to a 10- month low of 6.3 percent in July. Last month’s increases in food prices, which account for one-third of China’s inflation index, moderated to 14.4 percent, with meat prices rising 16 percent. Slower inflation of food prices is welcome relief for China’s leaders, who face headwinds with rising raw material and labor costs, slowing exports, and a near collapse of stock prices. The appreciation of China’s currency has stalled over the past month, and analysts are still betting that following the Olympics, China’s leadership will eliminate some of the market intervention measures it imposed on non-food items. 

U.S. pork and pork variety meat exports continued their surge in June, with 54,352 metric tons being shipped to China/Hong Kong – nearly four times the June 2007 total of 14,115 metric tons. As the largest volume destination for U.S. pork exports, China/Hong Kong led worldwide U.S. pork exports to a record-setting first half of 2008. Shipments to China/Hong Kong reached 254,445 metric tons - valued at $439.8 million – during this period. However, South China traders are now stating that because of full cold stores, falling domestic prices, and weak demand, there is margin pressure on new products arriving from the United States.