China Moves Aggressively to Assist its Pork Industry

China Moves Aggressively to Assist its Pork Industry

By Joel Haggard, USMEF Senior Vice President for the Asia-Pacific Region

Highlights:

• In 2008, China imported over 1.9 million tons of pork and pork products, a single-year record for any country in history
• China is investing – at a minimum – several billions of dollars in hog industry support programs
• Live hog inventories on Jan. 1, 2009, totaled 462.64 million head- 5.2 percent above the previous year
• Current Chinese hog prices are lackluster, at about RMB 10.5/kg. live weight (about $70/cwt.)
• Sluggish demand, ample live hog supplies and low domestic pork prices have reduced China’s demand for imports

China’s government has invested billions of dollars in recent years to accelerate the transformation of a hog industry, made up primarily of small farms, to one in which larger units dominate the production landscape. Since these subsidies are creating incentives to expand production, they may also have serious trade implications. Assistance has included direct cash subsidies to large-scale farms, tax breaks for hog producers and development of targeted hog-raising counties throughout the country. These policies seek to flatten China’s volatile hog cycle in which tens of thousands of small hog producers have traditionally moved in and out of the industry in response to rapidly changing profit signals. An industry made up of larger players is also viewed as beneficial to China’s efforts to improve its animal health situation.

While China is still home to approximately 100 million small hog raising units, the makeup of China’s hog industry is rapidly changing. Collecting accurate data from China’s hog farmers is notoriously difficult, but recent statements by the Ministry of Agriculture (MOA) estimate that in 2008, approximately half of the total live market hog output originated from “scale” farms - those farms marketing more than 50 animals per year. Earlier in the decade, these data showed that only 30 percent of China’s hog output was from scale farms, indicating a large increase in the number of operations qualifying for scale status. In fact, MOA has stated that the country had 2.244 million scale farms in 2007, which is more than double the number (approximately 1.1 million) recorded several years ago.

In recent weeks, MOA has trumpeted the results of its hog support programs. Under its sow subsidy program, RMB 1.957 billion (about $286 million) has been allocated to support the production of more than 52 million sows, or more than 80 percent of the country’s total sow herd. Another RMB 2.1 billion ($307 million) in production support subsidies has been allocated to targeted hog production counties, and RMB 2.8 billion ($410 million) was spent on the development of large-scale production units. Under this program, cash payments were awarded to farms based on size, with units producing more than 3,000 head of market hogs per year eligible for up to RMB 8 million ($1.17 million). In another major stimulus aimed at increasing pork production, China recently revised its enterprise tax law to exempt hog-raising operations from corporate tax.

It is difficult to accurately assess the impact of these subsidy programs on hog production because in late 2007 and the first half of 2008, surging imports and high pork prices also sent strong profit signals to producers, stimulating expansion. According to figures released by China’s national statistics agency, live hog inventories on Jan. 1, 2009, totaled 462.64 million head- 5.2 percent above the previous year. The number of live hogs processed in 2008 reached 609 million head. This represented an increase of nearly 8 percent over 2007, when a confluence of disease and a low in the hog cycle created one of the most serious pork shortages of recent decades. USMEF estimates that in 2008, China imported more than 1.9 million metric tons of pork and pork products, a single-year record for any country in history. Anecdotal reports also suggest that the loss in manufacturing jobs related to the global recession has forced some unemployed migrant workers to return to the land and try their hand at hog raising.

Current Chinese hog prices are lackluster, at about RMB 10.5/kg. live weight (about $70/cwt.), with some areas priced as low as RMB 10/kg. Falling wholesale pork prices are nearing levels not seen since May 2007, an indication of both sluggish demand and ample live hog supplies. Reports of significant disease outbreaks have failed to rally the market, and this week live hog prices tumbled based on belief that prices are heading lower. In field visits undertaken by USMEF last month, some producers predicted that hog prices would dip below RMB 10/kg. before summer. Some industry observers claimed that a new spate of reported Clenbuterol findings was evidence of weakness in the hog sector, as hog raisers try to salvage profits by trying to illegally stretch gains. In recent weeks, some local livestock markets have banned hogs shipped in from other provinces because of possible Clenbuterol abuses. But this week MOA officials declared China’s feed supply safe, claiming that it analyzed 25,000 samples in 2008.

Low domestic pork prices have also reduced China’s demand for imports. China’s pork imports – including those into Hong Kong – have fallen from their record pace of a year ago, but still remain high by historical standards. According to Chinese customs data, pork and pork product imports during the first two months of 2009 reached 89,770 tons, down 25 percent from the pace of a year ago, but still well above the 2003-2007 average of 38,000 tons.

Despite the current market weakness, the transformation of China’s hog industry structure is expected to continue. On the slaughter side, the Chinese government’s crackdown on unlicensed slaughter facilities – numbering in the thousands - is creating an opportunity for the establishment of larger, more efficient meat plants. While its total number of certified slaughter establishments is 23,318, China currently has only 78 plants capable of processing more 1 million hogs per year. A series of news reports in recent months has highlighted new investments in hog industry infrastructure, including market-leader Shuanghui’s announcement of a new RMB 400 million ($58 million) facility in Hunan, and a RMB 4 billion ($585 million) investment by COFCO in an integrated hog production project near the port city of Tianjin. While China’s largest meat processors are moving in the direction of greater integration, it is expected that contract procurement and cash hog purchasing will remain the industry norm in the medium term.

On the live hog side, China’s MOA has announced an eight-year plan to establish 437 targeted hog production counties (China has approximately 2,000 counties) where large-scale production of hogs will be supported. According to MOA’s plan, 400 million market hogs will be produced by these counties by 2015, with 65 percent of hog production within each county coming from scale enterprises. If achieved, this would be a 25 percent increase over the current output from these areas. In order to encourage market stability, China has announced a hog price alert system whereby the Chinese government will implement market stabilization measures - including the restriction of imports and the promotion of exports - if the ratio of the average live hog price to corn prices moves beyond certain trigger points. Although it produced a record 528.5 million tons of grain last year, China has announced that it would aim to boost annual grain production to 550 million tons by 2020. Economists believe this effort will require increasing the average annual per mu (1/15th of a hectare) subsidy of RMB 100 ($15.64).

Upcoming events related to the China pork market include:

• USMEF will be participating in the Global Pig Forum in Chengdu, China, May 14-15. The forum will include a discussion of the future development of China’s hog industry, as well as the status of the world pork industry during the current economic downturn.
• A team from the Nebraska Pork Producers Council will visit China the week of April 13 to assess market conditions and explore potential areas for pork export growth. 

# # #

The U.S. Meat Export Federation (www.USMEF.org) is the trade association responsible for developing international markets for the U.S. red meat industry and is funded by USDA, exporting companies, and the beef, pork, corn and soybean checkoff programs.

China Moves Aggressively to Assist its Pork Industry

By Joel Haggard, USMEF Senior Vice President for the Asia-Pacific Region

Highlights:

• In 2008, China imported over 1.9 million tons of pork and pork products, a single-year record for any country in history
• China is investing – at a minimum – several billions of dollars in hog industry support programs
• Live hog inventories on Jan. 1, 2009, totaled 462.64 million head- 5.2 percent above the previous year
• Current Chinese hog prices are lackluster, at about RMB 10.5/kg. live weight (about $70/cwt.)
• Sluggish demand, ample live hog supplies and low domestic pork prices have reduced China’s demand for imports

China’s government has invested billions of dollars in recent years to accelerate the transformation of a hog industry, made up primarily of small farms, to one in which larger units dominate the production landscape. Since these subsidies are creating incentives to expand production, they may also have serious trade implications. Assistance has included direct cash subsidies to large-scale farms, tax breaks for hog producers and development of targeted hog-raising counties throughout the country. These policies seek to flatten China’s volatile hog cycle in which tens of thousands of small hog producers have traditionally moved in and out of the industry in response to rapidly changing profit signals. An industry made up of larger players is also viewed as beneficial to China’s efforts to improve its animal health situation.

While China is still home to approximately 100 million small hog raising units, the makeup of China’s hog industry is rapidly changing. Collecting accurate data from China’s hog farmers is notoriously difficult, but recent statements by the Ministry of Agriculture (MOA) estimate that in 2008, approximately half of the total live market hog output originated from “scale” farms - those farms marketing more than 50 animals per year. Earlier in the decade, these data showed that only 30 percent of China’s hog output was from scale farms, indicating a large increase in the number of operations qualifying for scale status. In fact, MOA has stated that the country had 2.244 million scale farms in 2007, which is more than double the number (approximately 1.1 million) recorded several years ago.

In recent weeks, MOA has trumpeted the results of its hog support programs. Under its sow subsidy program, RMB 1.957 billion (about $286 million) has been allocated to support the production of more than 52 million sows, or more than 80 percent of the country’s total sow herd. Another RMB 2.1 billion ($307 million) in production support subsidies has been allocated to targeted hog production counties, and RMB 2.8 billion ($410 million) was spent on the development of large-scale production units. Under this program, cash payments were awarded to farms based on size, with units producing more than 3,000 head of market hogs per year eligible for up to RMB 8 million ($1.17 million). In another major stimulus aimed at increasing pork production, China recently revised its enterprise tax law to exempt hog-raising operations from corporate tax.

It is difficult to accurately assess the impact of these subsidy programs on hog production because in late 2007 and the first half of 2008, surging imports and high pork prices also sent strong profit signals to producers, stimulating expansion. According to figures released by China’s national statistics agency, live hog inventories on Jan. 1, 2009, totaled 462.64 million head- 5.2 percent above the previous year. The number of live hogs processed in 2008 reached 609 million head. This represented an increase of nearly 8 percent over 2007, when a confluence of disease and a low in the hog cycle created one of the most serious pork shortages of recent decades. USMEF estimates that in 2008, China imported more than 1.9 million metric tons of pork and pork products, a single-year record for any country in history. Anecdotal reports also suggest that the loss in manufacturing jobs related to the global recession has forced some unemployed migrant workers to return to the land and try their hand at hog raising.

Current Chinese hog prices are lackluster, at about RMB 10.5/kg. live weight (about $70/cwt.), with some areas priced as low as RMB 10/kg. Falling wholesale pork prices are nearing levels not seen since May 2007, an indication of both sluggish demand and ample live hog supplies. Reports of significant disease outbreaks have failed to rally the market, and this week live hog prices tumbled based on belief that prices are heading lower. In field visits undertaken by USMEF last month, some producers predicted that hog prices would dip below RMB 10/kg. before summer. Some industry observers claimed that a new spate of reported Clenbuterol findings was evidence of weakness in the hog sector, as hog raisers try to salvage profits by trying to illegally stretch gains. In recent weeks, some local livestock markets have banned hogs shipped in from other provinces because of possible Clenbuterol abuses. But this week MOA officials declared China’s feed supply safe, claiming that it analyzed 25,000 samples in 2008.

Low domestic pork prices have also reduced China’s demand for imports. China’s pork imports – including those into Hong Kong – have fallen from their record pace of a year ago, but still remain high by historical standards. According to Chinese customs data, pork and pork product imports during the first two months of 2009 reached 89,770 tons, down 25 percent from the pace of a year ago, but still well above the 2003-2007 average of 38,000 tons.

Despite the current market weakness, the transformation of China’s hog industry structure is expected to continue. On the slaughter side, the Chinese government’s crackdown on unlicensed slaughter facilities – numbering in the thousands - is creating an opportunity for the establishment of larger, more efficient meat plants. While its total number of certified slaughter establishments is 23,318, China currently has only 78 plants capable of processing more 1 million hogs per year. A series of news reports in recent months has highlighted new investments in hog industry infrastructure, including market-leader Shuanghui’s announcement of a new RMB 400 million ($58 million) facility in Hunan, and a RMB 4 billion ($585 million) investment by COFCO in an integrated hog production project near the port city of Tianjin. While China’s largest meat processors are moving in the direction of greater integration, it is expected that contract procurement and cash hog purchasing will remain the industry norm in the medium term.

On the live hog side, China’s MOA has announced an eight-year plan to establish 437 targeted hog production counties (China has approximately 2,000 counties) where large-scale production of hogs will be supported. According to MOA’s plan, 400 million market hogs will be produced by these counties by 2015, with 65 percent of hog production within each county coming from scale enterprises. If achieved, this would be a 25 percent increase over the current output from these areas. In order to encourage market stability, China has announced a hog price alert system whereby the Chinese government will implement market stabilization measures - including the restriction of imports and the promotion of exports - if the ratio of the average live hog price to corn prices moves beyond certain trigger points. Although it produced a record 528.5 million tons of grain last year, China has announced that it would aim to boost annual grain production to 550 million tons by 2020. Economists believe this effort will require increasing the average annual per mu (1/15th of a hectare) subsidy of RMB 100 ($15.64).

Upcoming events related to the China pork market include:

• USMEF will be participating in the Global Pig Forum in Chengdu, China, May 14-15. The forum will include a discussion of the future development of China’s hog industry, as well as the status of the world pork industry during the current economic downturn.
• A team from the Nebraska Pork Producers Council will visit China the week of April 13 to assess market conditions and explore potential areas for pork export growth. 

# # #

The U.S. Meat Export Federation (www.USMEF.org) is the trade association responsible for developing international markets for the U.S. red meat industry and is funded by USDA, exporting companies, and the beef, pork, corn and soybean checkoff programs.