The worst period for the feed industry in North China is over
Introduction
In April 2015, when feed consumption had just started, we went to Guangdong, the largest province in feed output, to conduct research. Now, as feed consumption has reached its peak, we set off again, starting from Weifang, Shandong, passing through eight areas - Fangzi, Hanting, Linqu, Linyi, Yucheng, Zhijia, Xinji, and Jizhou - and conducted on-site research on the main feed production enterprises, pig breeding enterprises, and laying hen breeding enterprises along the way.
After more than twenty years of development, Shandong's feed industry has achieved remarkable results. In the past three years, Shandong's total feed output has remained at around 21 million tons, steadily holding the position of the second-largest province in feed output. In addition, the latest data from the National Bureau of Statistics show that in 2013, Shandong's poultry egg output was 3.962 million tons, and Hebei's poultry egg output was 3.461 million tons, ranking second and third in the country respectively. Hebei, adjacent to Beijing and Tianjin, mainly supplies fresh eggs to the Beijing-Tianjin market and can also radiate to major sales areas such as Shanghai and Guangdong. Through research in these two regions, we can understand the current formula changes of feed production enterprises in North China, the inventory structure of laying hen and pig breeding enterprises, breeding profits, the capacity reduction situation in the breeding industry, and these enterprises' understanding of and participation in the futures market.
Sow restocking shows growth, but capacity formation still takes time
We visited three large-scale pig farms, with sow inventories of 30, 100, and 200 head respectively. The proportion of large-scale pig breeding households in North China is continuously increasing. Among households with fewer than 10 sows in inventory, 50% have exited the market. The exit of these households is the main reason for the overall low pig inventory in the market.
The improvement in the scale of pig breeding is conducive to improving production efficiency. The PSY (pigs weaned per sow per year) values of these three pig farms are at least 16 and can reach as high as 18, both higher than the 2014 national average of 15.92, but still lower than the average of 20 in developed countries such as the United States.
The feed-to-meat ratio in pig breeding also varies greatly. For pig farms with more refined management, the feed-to-meat ratio can reach 2.5, while for poorer ones it is above 3.0. In cases where pigs are held back from market, the feed-to-meat ratio is even higher. In the first half of 2015, pig prices remained strong while feed prices continued to decline. Breeding households generally extended the feeding cycle, raising the slaughter weight of fattening pigs to 240—250 jin, while the normal level is 200—220 jin.
Among the three pig farms we visited, one did not expand its herd because its environmental protection facilities did not meet standards, while the other two expanded their sow inventories, with the expansion scale reaching 100%. However, pig inventory remained flat compared with the same period last year, and fattening pig inventory declined year-on-year in both cases. The reasons for expanding sow herds were, on the one hand, three consecutive years of losses had reduced sow inventory to a certain extent, leaving empty pig houses and providing convenient spatial conditions for expansion; on the other hand, pig prices rebounded starting in March of this year, and pig breeding profits reached 700 yuan per head, giving breeding households the funds to expand.
When pig prices soared in 2011, smallholders restocked blindly regardless of sow breed or weight, causing pig prices to fall for three consecutive years. During this research, however, pig farms reported that current pig restocking is relatively rational. Due to the exit of smallholders, the proportion of herd expansion in the overall market is only 20%, and restocking occurred relatively late, with most expanded sows in the late gestation or waiting-to-be-mated stage. Based on the calculation that replacement sows begin mating two months after restocking, gestate for 4 months, and piglets are slaughtered 6 months after birth, pig supply will only show obvious growth 12 months after replacement sow restocking. Our monitored data show that in May 2015, replacement sow prices began to rise sharply and restocking increased significantly. Therefore, it is estimated that pig supply will begin to grow in the second half of 2016.
The three pig farms we researched are all relatively optimistic about later pig prices: on the one hand, with the implementation of the new Environmental Protection Law, many farms near water sources and farms failing to meet pollutant discharge standards have been shut down, reducing overall market inventory; on the other hand, a large proportion of smallholders have exited the pig breeding market, and after pig prices recovered, these exited households did not engage in blind restocking like in 2011.
The above three pig farms believe that from the fourth quarter of 2015 to the first half of 2016, pig breeding can still remain profitable, and breaking even in the second half of 2016 will not be a problem. However, regarding pig prices, we remain cautious. In August 2015, the slaughter volume of designated large-scale pig slaughtering enterprises nationwide was only 15.0026 million head, down 19.05% year-on-year, with designated slaughter volume declining by 15% year-on-year for six consecutive months. At the same time, the cumulative slaughter volume from January to August 2015 fell by 12.06% year-on-year. Market supply is declining, while pig prices have already fallen to 18 yuan/kg, down 10% from the highest point. In addition, in the first half of 2015, the shipment volume and sales volume of China's two largest meat processing enterprises - Shuanghui and Yurun - both declined. Because the increase in pig prices was higher than the increase in terminal meat products, the net profits of processing enterprises fell sharply year-on-year. Weak terminal demand is fully exposed, so we remain cautious about the later increase in pig prices.
Scale level increased, laying hen inventory did not decline
In North China, the breeds of laying hens raised are mostly the Hy-Line series, and restocking mainly focuses on young chickens. Eggs appear 60 days after restocking, and all enter the peak laying period after 175—180 days, with the peak laying rate reaching above 85%. The Zhijia Poultry and Egg Development Zone in Gaocheng City, Shijiazhuang, Hebei, which we passed through during our research, was once the most concentrated area for laying hen breeding in northern China, but in recent years the outbound volume of poultry eggs has declined significantly.
Previously, Zhijia poultry eggs were mainly sold to Guangdong, Guangxi, and other regions, but now laying hen breeding has developed rapidly in Yunnan, Sichuan, Hubei, Hunan, and other regions. Because these regions are closer to sales areas and have cost advantages, Hebei's outbound poultry egg volume has begun to decline, and local sales have begun to increase. In the Hebei market, large-scale breeding households have installed equipment and launched clean eggs and branded eggs, directly entering supermarkets with acceptable profits, but smallholders with fewer than 10,000 birds in inventory have seen reduced competitiveness and have gradually exited the market, and the scale level of laying hen breeding has continued to increase.
The summer pause in laying among laying hens also differs among breeding households of different scales. For smallholders with fewer than 10,000 birds in inventory, the summer pause in laying is obvious. These households have relatively simple breeding equipment, with incomplete ventilation, heat insulation, and cooling equipment. During the high-temperature period each summer, there is about a 45-day period when the laying rate of laying hens declines by 5%—10%. In large modern breeding farms, however, laying hens basically do not experience a summer pause in laying.
In the areas we researched, laying hen inventory did not decline. From March to June 2015, when egg prices fell to 3.20 yuan/jin, some breeding households did cull chickens early, but most culled laying hens older than 480 days, and rarely culled those younger than 400 days. Moreover, after culling, they did not leave the houses empty to wait and see, but chose to continue restocking. From March to June, the price of day-old laying hens remained at a high level of 3.2 yuan/bird. Due to limited chicken house scale, smallholders mostly maintained laying hen inventory at the same level as the same period last year, and only a few smallholders planned to expand chicken houses, while large-scale breeding households had very considerable profits throughout 2014, and most of them expanded their chicken houses. One breeding farm we visited was building a new chicken house with a capacity of 50,000 birds, to be completed in November, and was preparing to continue introducing breeding stock. Therefore, it is expected that in the fourth quarter of 2015, egg supply pressure will still exist, egg prices will run below 4 yuan/jin, and the Dalian egg futures 1601 contract may fall to the 3,600 yuan/500 kg level.
Whether smallholders or large-scale breeding households, they are still very unfamiliar with egg futures and believe that the futures market is very far from them. Due to a lack of understanding of basic knowledge about the futures market, they believe that daily fluctuations in egg futures and spot prices should be consistent. Once a short-term divergence between futures and spot occurs, they become suspicious and worried about the futures market, and cannot make good use of futures tools to transfer risk. Therefore, as the market's understanding of egg futures gradually deepens, egg futures still has great room for development.