summary

The pig cycle has entered a new stage, and the relationship between supply and demand and the industry pattern are showing new characteristics. On the demand side, China's pork demand remained stable until 2014. Since then, due to factors such as an aging population and rising consumer consumption, pork consumption has declined and consumption of beef, lamb, and poultry has increased. On the supply side, industry concentration increased markedly after African swine fever in 2018. The proportion of large-scale farms with more than 500 heads increased from 36.6% in 2011 to 65% in 2022, and the Ministry of Agriculture expects the large-scale pig farming rate to continue to increase to 68% in 2023.

In the process of switching from the traditional pig cycle to the new pig cycle, we will face a pattern of oversupply. This means that the pig cycle will go through a long period of time in the bottom range (May 2023 to April 2024) until production capacity is fully removed.

Under the new pig cycle framework, the pig cycle will become smoother. The irrational “chase the rise and fall” behavior of large breeding institutions will be reduced; large pig companies will pay more attention to reducing costs and increasing efficiency to stimulate the production potential of each pig, thus replacing simple production capacity removal and expansion.

Recently, there has been a wave of increases in pig prices. As of June 11, the average wholesale price of pork reached 24.6 yuan/kg, and the increase in pig prices in the past month reached about 23%. Breeding profits have fully recovered. As of June 7, breeding profits were 322 yuan/head. Judging from historical experience, we can see a clear rise in pig prices when the average farming profit exceeds 300 yuan/head.

A new pig cycle has arrived. So, how will pig prices go in the future? How big will the increase be?

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Framework: New pig cycle vs traditional pig cycle, characteristics are changing

The pig cycle is a phenomenon of cyclical price fluctuations in pig production and pork sales. Specifically, when pork prices rise, farmers will expand production capacity, increase sow breeding capacity, and promote an increase in the number of pigs kept. After fattening and maturing, the number of pigs released will increase, the supply of pork will increase, and the price will drop. Farmers have observed a drop in pork prices, a reduction in production capacity, elimination of sows capable of breeding, a decline in the number of pigs kept and sold, a decrease in the supply of pork, and a rise in pork prices over and over again.

The pig production cycle determines that a complete pig cycle takes 3-4 years, and at the same time shows small cycle fluctuations within a year due to holidays and climate. Being able to breed sows represents production capacity, and keeping pigs represents inventory. Expanding pig supply must first expand production capacity. It takes 7 months for a pig to become a reserve sow. It takes about 5 months for a sow to produce a baby (114 days of pregnancy, 20 days of breastfeeding, 14 days of empty pregnancy). After laying a sow, after 1-2 months of incubation and a fattening period of 5-6 months, the pigs can be released.

As a result, 1) It takes about 18 months from adding sows to increasing the supply of pork, so the traditional pig cycle takes about 3-4 years. 2) It takes 11-13 months from production capacity to pork supply. According to historical experience, there is a transmission time lag of about 10 months between “pig cycle” production capacity and pig price.

The essence of the pig cycle is the relationship between supply and demand. Under the traditional pig cycle analysis framework, the demand side is generally stable. The key is on the supply side. In the past, China's environment with retail farming as the main focus has amplified price volatility.

On the demand side, it is affected by residents' income levels, population growth and consumption structure in the long term, and by seasonal eating habits, epidemics, food safety, and consumption substitution effects in the short term. China's pork demand remained stable until 2014.

On the supply side, mainly pig farming fluctuates cyclically. Furthermore, factors such as policy intervention (environmental protection, financial subsidies, storage and marketing systems) and natural disasters amplify supply fluctuations. Before African swine fever in 2018, China's farming industry was mainly free-range farming by farmers, and the environment where retail farming was the main focus amplified price volatility. Producers have a high degree of homogeneity, low industry concentration, individual producers have less influence on market prices, are more likely to “chase the rise and fall”, and insufficient epidemic prevention technology and capital are more likely to fluctuate. Pork prices show obvious characteristics of a cobweb cycle.

In recent years, both the demand side and the supply side of the pig industry have changed. On the demand side, pork consumption has declined and consumption of beef, lamb, and poultry has increased due to factors such as population aging and rising consumer consumption. Zhu Zengyong, chief analyst for monitoring and early warning of the entire pork industry chain of the Ministry of Agriculture and Rural Affairs, said that in 2020, China's per capita pork consumption decreased by 9.2% compared to 2014, with poultry consumption increasing 60%, beef consumption increasing 51%, and lamb consumption increasing 25% during the same period. On the morning of April 20, 2024, the “China Agriculture Outlook Report (2024-2033)” report issued by the Ministry of Agriculture and Rural Affairs suggests that during the outlook period, total pork consumption will continue to decline. Pork consumption is expected to drop to 54.79 million tons in 2033, down 5% from 2024, with an average annual decrease of 0.5%, while consumption of beef and lamb will grow at an annual rate of 1.2% and 1.4%. On March 1, 2024, the Ministry of Agriculture issued the “Implementation Plan for the Regulation and Control of Pig Production Capacity (2024 Revision)” to adjust the normal number of breeding sows from 41 million heads in 2021 to 39 million heads, and the lower normal holding limit from 95% to 92%.

On the supply side, with the historical process, policy orientation, and the promotion of the epidemic, industry concentration increased. Many small-scale farms were eliminated from swine fever in 2018, speeding up the process of increasing industry concentration. After African swine fever in 2018, the share of 13 listed companies listed in the country increased by about 2 times to 14.3% in 2021; the share of listings with more than 500 heads increased from 36.6% in 2011 to 65% in 2022. In recent years, China has implemented a large-scale farming strategy to encourage breeding plants to expand production capacity while continuously reducing the size of ordinary farmers. Large-scale farming has a scale effect over free-range farmers, and has more advantages in management, technology, and capital, which is conducive to enhancing market stability and reducing the blindness of retail farming. Retail farming will gradually shrink as the urbanization process accelerates, the aging rate increases, and capital and technology are scarce. The Ministry of Agriculture predicts that the large-scale pig farming rate will reach 68% in 2023, an increase of 3 percentage points over the previous year.

Currently, pig farming is mainly divided into two models. The first is the “self-breeding and self-supporting” asset-heavy model. Under this model, you need to build your own farm, which is typical, for example, Muyuan shares, small farms, and retail investors. In the face of large losses, leading companies can be indebted for a longer period of time, and retail investors cannot afford the continuous operation of heavy assets. The other is “company+farmer”. The company provides piglets, feed, vaccines, veterinary medicine, and technical personnel support. After the pigs grow to their weight, the company is responsible for recycling and selling and paying surrogacy fees to the farmers, such as Wen's shares, New Hope, etc.

The characteristics of the pig cycle are changing under the new framework.

In the process of switching from the traditional pig cycle to the new pig cycle, excess production capacity will inevitably be cleared. The pig cycle will experience a long period of time in the bottom range (May 2023 to April 2024) until the market pattern where supply exceeds demand changes.

The new pig cycle fluctuates less in price than the traditional pig cycle. Increased industry concentration may bring economies of scale. The production capacity of large farming institutions will continue to increase, and irrational “chase the rise and fall” behavior will decrease.

Increased cycle times. The dominant large pig companies have less control over production capacity and are less affected by current pig prices, and the pig cycle is smoother. After African swine fever in 2018, the country had excess pig production capacity, and leading pig companies experienced a long and painful period of debt. Since swine fever, the balance ratio of Wen's shares has risen from 34% to 63%, New Hope has risen from 43% to 74%, and Makihara has increased from 54% to 64%. After that, large pig companies will pay more attention to reducing costs and increasing efficiency to stimulate the production potential of each pig, thereby replacing simple capacity removal and expansion. Since the end of 2022, New Hope has transferred nearly 20 pig farm projects in Sichuan and Chongqing; the chairman of Muyuan Co., Ltd. proposed to explore the cost space of 600 yuan per pig from the five stages of feed, breeding, health management, breeding, and slaughter.

Empirical evidence: Four rounds of traditional pig cycles and one round of production capacity since 2006

Since 2006, China has generally experienced four rounds of the traditional “pig cycle”. The main characteristics are: First, each pig cycle is basically 3-4 years, and the downward period is slightly longer than the upward period. Mainly because profits declined during the downward phase, but as long as there is no loss, farmers are not very willing to quit; second, the strong pig cycle is mostly fueled by the epidemic.

The first round of the “pig cycle” was dominated by changes in production capacity, fueled by the epidemic. The current cycle period is from mid-2006 to May 2010. It took 4 years, with an upward cycle of 2 years, an increase of 132.6%, and a downward cycle of 2 years. Pork prices continued to be low in early 2006, causing the pig industry to lose money. Some farmers lost a lot and quit permanently, and a large number of sows were eliminated. In 2006, the number of breeding sows nationwide decreased by 3.6%, and the number of pigs kept decreased by 2.6% over the same period last year. After large-scale production capacity was exhausted, the number of pigs began to gradually spread to the pork supply side. In 2007, the highly pathogenic swine blue ear disease broke out all over the country, slowing down the pace of filling out the list. As a result, pork prices have been rising steadily since mid-2006. In 2007, the average price of pork in 22 provinces and cities across the country was 18.8 yuan/kg, up 41% from the previous year; in addition to short-term factors such as the Spring Festival, pork prices reached a high of 25.9 yuan/kg in March 2008. Since then, pork prices have begun to enter a downward channel. The H1N1 (swine flu) outbreak broke out in 2009, and food safety incidents such as clenbuterol and water-injected pork occurred in 2010. Public consumer confidence was thwarted, and demand declined in stages, further suppressing pork prices. In June 2010, the average price of pork in 22 provinces and cities across the country fell to a low of 15.5 yuan/kg.

The second round of the “pig cycle” is relatively classic. Prices are mainly driven by vitality within the pig cycle, and there are few external disturbances. The current cycle period is from June 2010 to April 2014, and it took about 4 years. Among them, the upward cycle from June 2010 to September 2011 was an upward cycle, which lasted 15 months, with an increase of 98%, and a downward cycle from September 2011 to May 2014, which lasted 32 months. Under the influence of the previous cycle, the number of sows that can reproduce began to decline in 2009. Entering 2010, the impact on pork supply began to gradually become apparent, and pork prices began to rise. In August 2010, the number of breeding sows dropped to 45.8 million, a low point during the cycle. After 13 months, pork prices reached a high point during the cycle. In September 2011, pork prices climbed to 30.4 yuan/kg. As pork prices soared, farmers increased their stocks of sows. Pork prices once again entered a downward channel and continued until the first half of 2013. In order to stabilize pork prices, in May 2013, the Ministry of Commerce and three other ministries and commissions jointly began collecting and storing frozen pork, which boosted market confidence and recovered in the short term. Pork prices declined again in 2014.

The third cycle is driven by changes in production capacity and environmental policies. The entire cycle was from May 2014 to May 2018, and lasted 4 years. Of these, May 2014 to May 2016 was an upward cycle, which lasted 2 years, with an increase of 76.6%, and May 2016 to May 2018 was a downward cycle, which lasted 2 years. At the end of 2014, pork prices crossed the W-shaped bottom and began to enter an upward range. Since 2014, China began implementing strict environmental protection regulations and focusing on increasing the scale of the pig breeding industry, causing a large number of free-range farmers to withdraw from the market, and the storage of pigs and sows that can reproduce began to enter a continuous downward channel. The outbreak of porcine erysipelas in the first half of 2015 reduced the supply of pork, and pork prices rose until May 2016. The characteristics of this pig cycle are affected by environmental protection and scale, and the rise in pork prices has not led to significant pig replacement. Because of environmental protection suppression and industrial efficiency, large-scale farming has increased industrial efficiency. On the one hand, it has increased the individual weight of pigs, and on the other hand, it has increased the number of piglets that can be raised. As a result, the number of piglets that can breed sows continued to decline. The number of pigs kept rose slightly by 3% in the second half of 2016, and the amount of pigs slaughtered was not significantly affected. Pork prices have been declining since mid-2016 and bottomed out in mid-2018.

The fourth cycle was affected by multiple factors such as African swine fever, environmental protection production limit policies, upward momentum within the pig cycle, and large-scale farming. It showed characteristics such as large increases and speed. The price increase was the highest in the previous pig cycle, and it can be called the “superpig cycle.” The current cycle period is from mid-2018 to April 2022, and took nearly 4 years. Since the end of 2018, the decline in pig storage in China has continued to expand, reaching a historic low of -40% year-on-year in 2019, and driving pork prices to continue to rise. The price of pork rose from 16 yuan/kg in mid-2018 to 56 yuan/kg at the end of 2019, an increase of 250%, the biggest increase in previous pig cycles. At the beginning of 2021, pork prices continued to drop, and “W” bottoms appeared twice. The first time in this round of “W” bottoms was in October 2021, and the second time was in April 2022.

African swine fever has brought about an increase in industry concentration, compounded by the upgrading of people's consumption and the aging of the population. The pattern of the pig industry at this time is already different from ten years ago.

The transition period from April 2022 to April 2024 is a transition period where the old and new cycles alternate. Among them, the transition period from May 2022 to April 2023 generated a “pulse” of pig prices.

This “pulse” was mainly influenced by speculative sentiment. The period is from May 2022 to April 2023, and it only took 11 months. It looks like an “atypical” pig cycle with a shorter period of time. In this phase, the average wholesale price of pork rose from a low of 17 yuan/kg in April 2022 to 35 yuan/kg in November 2022, an increase of 106%. Since then, it has entered a period of decline, and the grinding period is about one year. The “pulse” of pig price increases in this round was moderate and took a short period of time, and production capacity was not sufficiently removed. Even in April 2022, when the number of sows that can be raised was the lowest, the number reached 102% of normal holdings at that time. The “superpig cycle” associated with African swine fever brought about a huge increase in pig prices, attracting a large amount of speculative capital into the pig industry. In the same period, the Internet developed rapidly, retail investors were vulnerable to online news, and irrational speculation intensified. Domestic pig prices have risen too fast since May 2022. The main reason is that the market has irrational anti-sales and secondary fattening. Some media, especially self-media, fabricated and spread information about price increases and portrayed price increases, which has intensified the market's reluctance to sell in the short term.

After the “pulse”, the pig cycle continues to bottom between old and new, alternating between old and new. The grinding period is from May 2023 to April 2024. Why is it so long?

The production capacity of the “superpig cycle” is expanding too fast and is not easy to eliminate. In 2018, swine fever was compounded by an increase in the pig cycle, and pig prices rose sharply, reaching 40 yuan/kg at one point. Strong profits have led to rapid expansion of production capacity. According to some data, in 2018-2021, the total number of pig companies listed in the country rose from about 47 million heads to about 93.4 million heads, almost doubling. It is not easy to expand production capacity and eliminate it. In the downward cycle, many pig companies chose to “get through”. Since April 2023, production capacity has been reduced for 13 months, which is still equivalent to 102% of normal holdings.

After African swine fever, new production capacity was gradually released, and sales volume continued to be high across the country, suppressing pig prices for a long time. After swine fever caused pig prices to soar sharply, China introduced various subsidies to stabilize pig prices to encourage increased production capacity. Under China's mainstream three-yuan breeding system, it takes 34 months for new production capacity to be released. This part of production capacity has continued to be released in recent years, suppressing pork prices. In 2023, the number of pigs released nationwide reached 726.62 million, an increase of 3.8% over the previous year, for the fifth consecutive year.

Outlook: An upward cycle under the new pig cycle framework begins

Recently, pig prices have risen significantly. As of June 11, the average wholesale price of pork reached 24.6 yuan/kg, and the increase in pig prices in the past month reached about 23%. On May 24, farming profits were fully recovered; as of June 7, farming profits were 322 yuan/head. According to historical experience, when breeding profits break through 300 yuan/head, the pig cycle will break through the “W” bottom and officially enter an upward period.

Leading pig companies have differences in sales volume and revenue, and prices have all risen. In May 2024, New Hope (000876.SZ) sold 1.366,800 pigs, -5.27%, the average sales price of pigs was 15.42 yuan/kg, 8.59%; Wen's shares (300498.SZ) sold 2.378,900 pork heads, 13.63%; the average sales price of hairy pigs was 15.83 yuan/kg, 10.47%; Makiyuan Co., Ltd. (002714.SZ) sold 5.86 million pigs, 1.67% of the same period, the average sales price of commercial pigs was 15.52 yuan/kg, the average sales price of commercial pigs was 15.52 yuan/kg, the same as 15.52 yuan/kg The ratio is 9.45%.

We judge that the “pig cycle” has entered an upward period, but based on the characteristics of the new pig cycle, there is not much room for growth in this round.

First, it has been 13 months since production capacity was removed. According to historical laws, continuous loss of production capacity for about 10 months will be transmitted to pig prices. Breeding sows reflect pig production capacity year over year. In March 2023, the same ratio for breeding sows was 2.9%, and in April 2024, the same ratio for breeding sows was -7.0%. They have continued to degrade for 13 months.

Second, production capacity stocks are close to the equilibrium point, and the oversupply situation is about to be reversed. Currently, 39.86 million sows can be bred, and the normal number of sows is 39 million, which is still slightly higher than normal. At the current rate of removal, it may decline rapidly until it breaks through the minimum normal holding limit of 35.88 million heads.

Looking at the historical pig cycle, the two pig cycles, which began in 2014 and 2018, experienced a rapid decline in production capacity for 2-3 quarters before starting a sharp rise in prices. Among them, the year-on-year decline in sow breeding capacity remained above -20% for many months. The rapid loss of production capacity also created room for pig prices to rise.

Third, there has been a significant increase in the pig food ratio. As of June 7, the pig food ratio had reached 7.66, and the upward trend accelerated after breaking out of the excessive decline range for the first time on March 15 (the pig food ratio was below 6). According to historical data, the pig food ratio may see a rapid rise in the pig cycle after breaking through 7.