Pig farmers face a dilemma when selling pigs: reluctant to sell early, afraid of losing money if selling late
"Pig prices have been falling continuously since June, and have already dropped to near my break-even line. When I bought the piglets, it was exactly in March this year when pig prices were at their most expensive. In the past two days there seems to be a slight rebound again. Should I send them to market or not?" One farmer voiced the doubt that has been weighing on his mind recently.
In the first 5 months of this year, pig prices continued to rise, with the average price of foreign three-way crossbred pigs in all provinces nationwide reaching as high as 21 yuan/kg. After entering June, pig prices began to turn downward, and showed a rapid decline, with the Zhihua pig price index falling by as much as 10% for the whole month. In July, pig prices still continued June's decline, but the pace of decline slowed, with the Zhihua pig price index for the whole month running in the range of 18 yuan/kg-19 yuan/kg, a monthly decline of 5%.
This month, pig prices stabilized and rebounded. Is this a continued upward attack or the formation of an "M" top? This topic has triggered fierce debate in the industry. Analysts believe that pig prices in the third and fourth quarters may remain at high levels, but it will be difficult to set new highs. Demand is weak while supply is recovering, so the rebound is only temporary, and the overall trend is still one of slow decline.
The "crazy pig cycle" is no longer what it used to be
"After the start of summer, domestic temperatures gradually rose, terminal meat demand gradually faded, and in addition farmers held back large numbers of pigs for market, resulting in ample supply of heavy pigs in the domestic live hog market. The domestic live hog market entered a phased situation of supply exceeding demand. Slaughterhouses continued to lower live hog purchase prices while strictly controlling live hog purchase weight standards, and farmers dumped their inventories, causing domestic live hog prices to peak and fall back." said Li Wenxu, an analyst at SunSirs.
Yuan Song, an analyst at Zhihua Data, pointed out that there are many reasons for the recent peak and fallback in pig prices. First, the number of fat pigs sent to market increased. Since the beginning of this year, due to declining production capacity, the supply of fat pigs has been tight, driving pig prices to continue rising and repeatedly setting new highs. For pig prices to remain high, the tight supply pattern had to be maintained. But after entering June, the proportion of fat pigs rose, increasing the supply of live hogs available for market. The tight supply pattern eased, high prices became difficult to maintain, and loosening declines appeared. The turn in pig prices stimulated farmers' selling sentiment, and market releases increased substantially, leading to a sharp price drop.
Second, the weather turned hot and pork consumption faded. Entering June, temperatures gradually rose across the north and south, the market supply of various fruits and vegetables increased, prices were cheap, and meat consumption faded. Pork prices, however, rose along with pig prices. By June, the ratio of pig prices to meat prices reached a new high of 0.66:1, and slaughtering enterprises' profits shrank severely, forcing them to cut volume and press prices down.
Third, breeding costs increased. First, feed costs: after live hogs exceed 230 jin in weight, feed conversion rates decline. Meanwhile, corn, soybean meal and fish were all rising, increasing costs, and the cost of holding pigs back for market kept rising. Second, disease costs: for large pigs, hot weather worsens stress performance and increases the probability of illness. Therefore, when pig price gains became unsustainable, the motivation to send pigs to market rose rapidly.
In July, the Yangtze River basin was hit by heavy rainstorms and floods. After the disaster, pig farms concentrated on sending pigs to market and dumping them, and the fat pigs sent to market were relatively heavy in weight and uneven in quality, putting enormous pressure on pig prices in the disaster areas. At the same time, it also dragged down pig prices in surrounding areas.
Entering August, influenced by the Start of Autumn solar term, prices once again showed an upward trend. According to Zhuochuang Information data, in early August the national average price of foreign three-way crossbred pigs was 18.12 yuan/kg, down 0.04 yuan/kg from the end of July, a decline of 0.22%. At that time the market showed a situation of supply exceeding demand, and slaughtering enterprises purchased smoothly. But by August 3, prices rose. As of August 5, the national average price of foreign three-way crossbred live hogs was 18.38 yuan/kg, up 0.26 yuan/kg from the 1st, a gain of 1.43%.
Regarding the recent price rise, Ji Guangxin, an analyst at Zhuochuang Information, believes there are mainly three reasons. First, earlier price cuts led to concentrated market releases of live hogs, causing the volume available for market in early August to decline. Second, farmers were reluctant to sell and held pigs back for market, increasing the difficulty for slaughtering enterprises to purchase and creating competition for pig sources, forcing them to raise purchase prices and settlement prices. Third, the Start of Autumn solar term and the northern custom of "putting on autumn fat" boosted consumption slightly, benefiting the live hog market.
A last flash of light or a full-blooded revival
"From a fundamental perspective, the industry's production capacity is still at a low level. Since last year, the inventory of breeding sows has fallen to a near ten-year low, and the overall pattern of relatively low fat pig supply this year has not undergone a fundamental change." Yuan Song said.
In July, the Yangtze River basin experienced heavy rainfall. Multiple concentrated breeding areas suffered floods and waterlogging disasters. According to Zhihua's understanding of farms and households in the disaster areas, this heavy rainfall was fierce, with floods breaking out in many provinces including Hubei, Hunan, Henan, Anhui and Jiangsu. Pig farms were submerged, fish ponds were washed away, and farmers suffered severe losses.
Yuan Song pointed out that the floods directly led to a very high mortality rate among piglets. Pig farms took on water, and a relatively large number of small piglets drowned. Therefore, this will affect the supply of fat pigs before the Spring Festival, reducing it and pushing up pig prices before the Spring Festival. Second, sow deaths and culling increased. The number of sows directly drowned was not large, but due to falling pig prices and disaster-stricken pig farms, large numbers of sows were culled, resulting in weak recovery of breeding sow inventory in July.
In addition, the rebound in inventory is currently slow. In June, live hog inventory increased 0.7% month-on-month and decreased 2.1% year-on-year; breeding sow inventory was flat with the previous month, remaining stable, and down 3.64% year-on-year. In June, the designated slaughter volume of live hogs above designated size was 14.37 million head, down 3.9% from the previous month and down 9.6% year-on-year.
"Pig prices are expected to continue running at high levels in the second half of the year. Considering that breeding sows had not yet rebounded substantially in July, it is expected that from the end of the year to before the Spring Festival, live hog supply will again become tight, and pig prices may return to high points." Yuan Song pointed out that at present, production and sales areas are actively sending pigs to market, supply is normal, but the weather is hot, the willingness to hold pigs back for market is weak, slaughterhouse sales are light, and purchasing willingness is low, so short-term pig prices may still continue to adjust weakly. As temperatures rise further, consumption may weaken further, but after two months of increased market releases, large pig supply in August will decrease.
"The rise is only a brief performance. The overall trend is a slow decline, and it can be said that we have entered a downward cycle. But this downward cycle will last relatively long, and the speed and magnitude of the decline will also be relatively slow." Ji Guangxin analyzed.
From the perspective of industry fundamentals, Ji Guangxin said that pork demand is currently weak overall. From the sales situation of slaughtering enterprises, monthly pork sales this year have all decreased by 30% compared with the same period last year, with some down by around 50%. As for live hog supply, although live hog inventory is still below the level of the same period, it has already begun to rise month-on-month and will also show a slow recovery in the future.
However, Ji Guangxin believes that although live hog prices will decline slowly in the future, they will still remain above the cost line, and farmers should still be profitable, only with reduced profits compared with now.
The focus of monetary policy is not inflation
After the adjustment of the new base period for the 2016 CPI, the old category of meat, poultry and their products was adjusted to livestock meat, and its share of the CPI weight was sharply lowered from 7% to 10% down to about 4.3%. The share of pork in the CPI weight was also lowered to about 2.3%.
Brokerage analysts believe that as the upward inflation pressure brought by pig prices and vegetable prices gradually fades, inflation pressure in the second half of the year will be relatively small. And because pork CPI was relatively high in the second half of last year, under the influence of the base effect, the pressure of pig prices on CPI will be significantly weakened.
"Inflation will have less constraint on policy in the second half of the year. Although there were earlier worries that floods would put pressure on prices, judging from recent price fluctuations, grain prices are stable, pork prices have declined somewhat, and the rebound in vegetable prices has been relatively small, so inflation pressure is weakening." said Sun Fu, an analyst at Zheshang Securities.
In fact, the focus of monetary policy now is no longer at the inflation level, but rather the problem of the "virtual" and "real" mismatch of funds.
Sun Fu believes that capital outflows were released relatively fully at the beginning of the year, the flexibility of RMB fluctuations increased, and under the expectation of a weak pace of Federal Reserve rate hikes, the large-scale capital outflow seen in the second half of last year is unlikely to reappear. This reduces the necessity of cutting the reserve requirement ratio, and more use will still be made of innovative tools to regulate liquidity. At the same time, real estate prices in first-tier cities and some second-tier cities may constrain interest rate cut policy. With price rise expectations still present, and considering the current low inventory in these areas, interest rate cut policy may still stimulate prices to continue rising. The Political Bureau meeting emphasized "curbing asset price bubbles," and real estate prices are a key focus.
Looking at the spread between the 10-year government bond yield and wholesale market financing rates, Sun Fu said, and looking at the 1-year benchmark deposit rate and the inflation level, even if interest rates are cut, the room is relatively limited, 50BP. In summary, he believes that monetary policy will be relatively cautious in continuing to loosen, the necessity of cutting the reserve requirement ratio is relatively small, and more use will still be made of innovative tools for regulation; even if interest rates are cut, the short-term room is not large.
Pan Xiangdong, chief economist at China Galaxy Securities, pointed out that from a total volume perspective, China's monetary policy has always maintained a prudent tone. Various assets have absorbed excess liquidity and hindered the transmission of liquidity to the real economy, causing the real economy to feel that our monetary policy is relatively tight. At the same time, the prices of various assets are in a process of bubble accumulation. This reflects some characteristics of China's current economic and financial market development and the current state of its financing structure.
He believes that while the economy is declining, the easing of monetary policy and ample liquidity cause funds to chase high-return risky assets. In recent years, wealth management products, the stock market, bonds, the futures market and the real estate market have seen irrational rises in turn. Funds are unwilling to enter the real economy and prefer to stay in asset markets "amusing themselves." The result is naturally that the real economy feels monetary policy is too tight, while the virtual economy shows that monetary policy is too loose.
"At present, in the context of supply-side structural reform, monetary policy must make a greater contribution to stable growth in China's economy. It can no longer be limited to continuously releasing liquidity. The urgent task is to change the pattern of misallocation of financial resources, solve the problem of idle funds systematically, and improve the efficiency of liquidity use, so that monetary policy under the new normal can truly create a more suitable monetary and financial environment for economic growth." Pan Xiangdong said.