This past week we were with Chinese pork Industry people. As China is a key export market for USA/Canada pork we believe the state of the Chinese Industry is quite important.
Although Hog Prices in China are around 98 USD liveweight a lb. (13.37 RMB/kg Liveweight) the average Chinese producer is currently averaging a loss per hog of about $40 per head.
The latest Chinese hog farm inventory indicates March was 434.36 million head, down from October 471.41 million head. Down 37.05 million head (Doesn t that indicate China s scale? The decrease of 37.05 million would be over half of the US Inventory.)
Why is China losing money with 98 USD liveweight? Corn is $8.00/bushel and the average produces is just over 17 hogs marketed/sow/year.
The inventory decrease in China is not only a result of financial losses leading to liquidation but diseases (Foot and Mouth, PRRS, PED and /or PCV2 etc.). China is a drug company s dream market. Asian flu in China magnifies the protein supply challenge. Lots of diseases cutting supply.
China has increased Corn Production for ten consecutive years. The China Corn Crop should exceed 20 billion bushels in 2013. They need it too as increased meat protein demand from 1.3 plus billion people takes more and more feedstuffs.
The decrease of 27 million pigs in inventory over the last six months will certainly lead to higher China prices at some point when that happens we expect the scenario to enhance pork imports from USA/Canada. (Also 37 million less pigs eat much less corn.)
The industry people from China we visited this past week reiterated the reality of ongoing new swine barn construction as China moves production rapidly from backyard to new farms. The challenge of the industry are many, such as: training pig people to work in the new barns, stocking new barns with already diseased pigs, finding barn locations that have a chance of being bio-secure.
Currently there are many investor situations in China where people who have no knowledge of pig production invest in swine farms. We expect like the USA years ago such investor structures will result in failure and a trail of tears for these amateur pig producers. As we all know pig production looks relatively easy on paper and MBA projections. The stark reality is execution is the key. This is a commodity and lack of productivity and cost control is a recipe for financial ruin.
China swine inventory has decreased, financial losses continue ($40/head). At some point China s pork price will jump significantly pulling USA/Canada pork to fill the void, enhancing USA/Canada hog prices.
The USDA Pork Cut-out was 81.53 a couple weeks ago. At the end of last week it was over 87 . A real increase and a reflection of demand relative to supply. We expect to see Pork Cut-outs to continue to improve as hog marketing s decrease over the coming weeks with hog prices following higher.
The US hog price is currently about the same as last year. Last year lean hogs go to $1.00 lean a lb. in the summer. We expect the same in 2013.
US National lean carcass weights of 208.70 lbs. are about 2 lbs. lower that the same week a year ago. Reflects a very current market inventory.
The USDA is projecting increased pork production in 2013 compared to 2012. Year to date US pork production is actually down -1.1%. We expect US pork production will not increase year over year and we actually expect a decline. The liquidation of sows in USA/Canada that started last July is about to come home to roost.
Producers have been losing money, continue to lose money. Many have lost faith that the industry will ever be good again. The reality is many are marooned in industry with no viable exit strategy.