The Third Wave of Opportunities in the Livestock and Poultry Industry Chain Has Arrived

Since the beginning of this year, we have focused on the analysis and recommendation of the investment rhythm and targets in the livestock and poultry chain, thus giving rise to "Series Reflections on Investment Opportunities in the Livestock and Poultry Industry Chain No. 1-13," in which we highlighted clear and precise opportunities such as leaders leading the rise in April, broad gains in July, and feed and vaccines taking the lead in August. Now that hog prices have undergone a two-month narrow-range adjustment, we emphasize that around November will mark the starting point of the peak-season rally in hog prices before the Spring Festival, and we recommend actively participating in the third wave of opportunities in the livestock and poultry chain in mid-to-late October.

First, from an industry perspective, the upward journey of hog prices before the Spring Festival is beginning (expected in November), and the current price adjustment continues to clear out hog production capacity. In mid-August we emphasized that hog prices would enter a high-level adjustment lasting more than 2-3 months (based on the inventory structure, judging that hog supply would increase from September onward), so the strategy given to the market at that time was that heavy-position holders should continue to hold (the medium-term trend is upward, and intermediate fluctuations can be traded less), while light-position holders could use feed, vaccine, and poultry industry stocks as core positions for phased strategic defense. Fortunately, industry data and secondary market performance indeed confirmed our above forward-looking judgment.

⟦NL> However, at the current point in time, the effects of earlier passive restocking have emerged, and we judge that hog prices will stop falling and rise in November, with hog prices optimistic before the Spring Festival and expected to reach above 16 yuan/kg. Since the beginning of this year, we have used inventory structure indicators to analyze short-term hog price rises and falls with accurate predictions, for example, domestic hog prices faced adjustment from September to November. And our latest observation of industry data found that since July——September, piglet restocking has been passive, with the price of three-way crossbred piglets maintained at 23-25 yuan/kg, down more than 20% year-on-year. Among this, grassroots surveys of designated farms showed piglet feed sales down 5.6% year-on-year, which means that after November, overall hog supply is expected to decline year-on-year in sync; and the hog inventory structure data at the end of September also adjusted accordingly, with large hogs accounting for 12-13% (up 1-2 percentage points from July), while the proportion of medium and small hogs around 80 kg instead declined (among which 80——100 kg fell to 9.7%, which would be exactly marketed around November).

The above grassroots data indicate that the continuously low real restocking by farmers from July——September will lead to a reduction in large hogs available for marketing after November, while demand in the fourth quarter is in a stage of month-on-month recovery, so starting from November (a four-month lag), hog supply and demand will again show a phased shortage of supply relative to demand (this is from a short-term perspective; from a medium-term one-year perspective, hog prices are in an upward cycle throughout), and hog prices will also usher in a rising market ahead of schedule. Therefore, this will lead to a fairly significant difference between before the 2015 Spring Festival and 2014——the possibility of a peak-season decline is very small, and we are bullish on hog price trends before the Spring Festival, expected to reach above 16-17 yuan/kg.

Regarding medium-term hog prices, our view has also been slightly revised; the current hog price adjustment is certainly conducive to further capacity destocking, so the medium-term upward positive factors are strengthened.

Although domestic sow prices gradually began to improve from August (rising from 1,300 yuan/head to 1,600 yuan/head) and the industry saw a certain mild restocking, breeding costs from July——September were sharply elevated (spot corn prices rose 10%), resulting in no obvious improvement in industry profitability, and hog prices further adjusted by 1 yuan/kg at the same time. Therefore, the intensity of sow culling in the industry is still relatively large (grassroots data show it expanded compared with August), which may show that the Ministry of Agriculture's sow inventory in September continues to hit a record low (and may fall further in October). Therefore, the current decline in domestic sow inventory will reduce hog supply pressure in 2015, improving the supply-demand pattern and bringing a substantial recovery in prosperity.

Second, regarding investment opportunities, we recommend actively participating in the third wave of opportunities in the livestock and poultry chain starting in mid-to-late October, and feed and vaccine leaders are also suitable. For breeding stocks, after a 10%-15% adjustment, investors can now lay out positions and buy in advance, quietly waiting for the substantial rise in livestock and poultry prices before the Spring Festival; and currently it is still an excellent time to lay out feed stocks and vaccines in the medium cycle.

(1) For livestock and poultry breeding stocks, in terms of industry trends, the prosperity of the livestock and poultry chain will continue upward at least until September-October 2015, so breeding stocks are far from finished; at the same time, in this major upward cycle for livestock and poultry, capacity destocking in the poultry chain is more thorough (grandparent chicken import volume down 40% year-on-year), so in breeding, looking purely at industry elasticity, we are more inclined toward the poultry chain. In the short term, hog prices will once again begin an upward journey in November. After breeding stocks have generally adjusted 10%-15%, we recommend that investors again actively lay out positions, actively positioning for the substantial surge in livestock and poultry chain prices in the medium term (two upward time points: 1. within 2 months before the 2015 Spring Festival; 2. from around May 2015 when hog prices rise sharply until October-November).

(2) For feed and vaccine stocks, based on Qilu Agriculture's medium-term hog price forecast and the industrial changes in the livestock and poultry chain, the feed and vaccine industry in July-August 2014 was in a stage of rising from the bottom of the medium cycle, currently similar to breeding stocks in April, improving month-on-month but slightly weaker year-on-year, yet trending upward.

In the second half of 2014, the center of hog prices will rise, and the recovery in prosperity in 2015 will both bring a clear rebound in feed demand. The reason we say the current point is the bottom is that although the first half was the bottom of hog prices, it did not cross the cost line, and at that time restocking and downstream consumables demand were not vigorous; while currently hog prices have gradually crossed the cost line, and as restocking activity rises, feed demand will also rise, that is, it benefits most in the third stage (both inventory and profitability rising).

Moreover, even if hog prices may fluctuate and adjust in Q4 2014 and after the 2015 Spring Festival, the impact on downstream consumables will not repeat the scene of the first half of 2014. Because the investment logic of feed and vaccine stocks differs from that of breeding stocks: breeding stocks look at the upward slope of hog prices; while the prosperity of the feed and vaccine industry looks at hog prices and inventory remaining at highs, and even more at performance. In 2015, even if hog prices pull back in the first half, the possibility of breaking new lows is not great, so the performance of feed and vaccine stocks may show positive growth (the 2014 base is too low). Therefore, this is also the logic behind our recommendation to allocate to feed and vaccine stocks now rather than waiting until after the 2015 Spring Festival.

In summary, after proposing the second-stage broad-rise logic for the livestock and poultry chain from May——July, we emphasize that mid-to-late October is an excellent time point to lay out for the third wave of opportunities in the livestock and poultry chain.