Is the rebound in pig prices a full recovery or just a flash in the pan?

This round of pig price declines began in early June. The price of Neisan live pigs fell from a peak of 21 yuan/kg at the end of May to around 18 yuan/kg. The decline lasted as long as 2 months, with a drop of 15%. After 2 months of continuous declines, pig prices rebounded near the 18 yuan/kg mark. This rebound began in the northern region and gradually spread across the country. But is this rebound in pig prices a full rebound or just a flash in the pan?

I. Supply market

1. Recovery of production capacity in the major cycle. From 2015-16, large groups continuously built new capacity and acquired production capacity. Although the number of breeding sows is still at a low level and environmental protection policies have extended the cycle for production capacity recovery, overall there is an ample supply of reserve sows, and it is relatively common in the market for farmers to keep female pigs intended for meat as reserve sows.

2. Import shock: Given the currently huge price gap between domestic and foreign prices, large meat processing enterprises face considerable cost pressure. In addition, foreign countries are paying increasing attention to China's pork consumption market. June imports hit a new high of 194,000 tons, and imports from January to June reached 762,000 tons. With pig prices fluctuating at high levels in the second half of the year, pork imports are expected to remain high. In 2016, full-year imports are expected to reach 1.2 million tons, and the impact of imported meat on pig prices continues to increase.

3. With pig prices rebounding strongly, the psychology of holding back sales in hopes of higher prices has reappeared. Pig prices turned fully positive in the past few days. In a survey, 60% of farmers believed this rebound would be relatively long-lasting. Blind optimism about the future market will lead to a heavier situation of holding back live pigs from sale, creating certain risks for future market supply.

II. Consumer market

1. The effect of "putting on autumn fat" in the north is a short-term stimulus, and both the duration and extent of the stimulus are extremely limited.

2. In addition, high prices suppress demand, and substitution is obvious. According to data from the National Bureau of Statistics, "In the first half of 2016, China's output of pork, beef, mutton and poultry was 38.53 million tons, down 1.3% year on year, of which pork output was 24.73 million tons, down 3.9%." Beef, mutton and poultry output was 13.8 million tons, an increase of nearly 500,000 tons year on year, with a rise of 3.6%. It can be seen that in 2016, with pig prices overall at high levels, pork consumption was affected to a relatively large extent, and the phenomenon of substitute consumption was fairly significant.

3. At present, consumer demand shows no obvious improvement. On the one hand, this is due to changes in consumption habits; on the other hand, it is mainly due to food safety issues. The market share of processed meat foods has shrunk somewhat. At the beginning of the year, a well-known meat processing enterprise reported a 500 million yuan short-term financing bond default, which also indirectly reflects the operating conditions of meat processing enterprises.

Stimulated by consumption for "putting on autumn fat" at the Start of Autumn in the north, pig prices in Northeast China rose rapidly. Combined with the impact of a phased supply gap (mainly caused by the high piglet mortality rate due to the cold wave at the beginning of the year and the epidemic), and because pig prices continued to fall, farmers were able to sell pigs relatively smoothly, and the proportion of large pigs and cull sows sent to slaughter was relatively good. The disaster situation in the south reduced future supply to a certain extent, but rather limitedly. More importantly, the risk of epidemics surged sharply, farmers had demand to clear their barns, and this overdrew future supply. Overall, pig prices rebounded by a certain margin. Pig prices will fluctuate upward in the first half to middle of August as a whole, with a phased high point between 9.5-9.7 yuan/jin. However, in terms of supply and demand, there has been no fundamental change. Affected by the recovery of production capacity in the major cycle, the impact of imported meat continues to increase. At present, pig prices in Northeast China have stabilized and even shown a slight decline. We believe there are relatively large risks for pig prices in late August and September.