The live weight pork price paid by Chinese packing houses in 2016 has been steadily rising from 17rmb/kg to a high of 20rmb/kg in June. In August the price has fallen slightly to 18 rmb (2.71USD) a kg, which this commentator concludes is the result of high temperatures reducing the demand for pork combined with the larger number of market hogs being slaughtered, writes Alexander Kovachevich, GM China Area, Genesus Genetics.
In this extreme heat, The ‘Autumn Tiger’ as it’s known in China, farmers, for the most part, are unable to control barn temperatures and prefer to sell hogs out.
At 18rmb/kg producers are still making good money, expansion plans are being made, loans being repaid and futures being planned!
A market hog is making a producer between 800 for professional companies to 1200 rmb profit for small scale farmers, the difference being the cost structure of the finishing facility. Company self-finished pigs have a higher cost. Companies such Wen’s who don’t finish their own pigs at all are the clear winners. In the past it may have been the idea of some companies that they would try to finish most of their own pigs, this has the advantage of reducing the number of contract farmers to deal with, keeping quality systems and management internal.
However these same companies now see that the advantages of this business model, do not outweigh the disadvantages. Wanting to own and operate your own finishing facilities is an extremely capitally intensive model, and when you want to grow in a hurry then cranking up your production is slow. Money, Land and especially Human Resources are all needed for expansion, more so for finisher barns than breeding. And although we expect the current high prices to stay for the next 6 to 18 months, in the end who really knows?
If you can more rapidly increase your pork production by getting more contract farmers to finish your animals you have a much better chance to benefit from the high prices longer and if low prices are seen then reducing the amount of finishers can be done without wasting your own finishing spaces and resources.
Most of the producers we have spoken to are planning on building sow units only and will contract finisher production. However one of the largest producers is contemplating a ‘Russian’ style closed system with ‘Farrow to Finnish’ in one location based on the belief that efficiencies of scale will maximise cost savings, but from the general consensus we have heard it appears sows and commercial hogs will be mainly produced separately in the ‘north American’ style. The bulk of the investment focusing on a high health sow herd in a remote and bio-secure location, then trucking the finishers to family farms near grain production and markets. Interestingly enough we also heard that the cost of building a single sow place is very similar to North America (land costs not factored in.) When you think that Chinese producers also use some North American grain for feed it would seem that production costs are very similar.
So with the money flowing in pork producers are busy planning more production, but as the loans of the past lean years are still being paid off and suitable land being difficult to find with bio-security in mind, we have not heard of any new farms actually being built yet. But they will…
Finally, for the first time in China I have heard several pork producers talk about branding. Jim Long, our President of Genesus has mentioned the potential of branding in the past and this idea seems to have seeped through to China. As anyone who has been in China will tell you, the power of ‘BRAND’ is strong in here.
Pork may be a commodity product on the whole, but he who creates a real brand of pork will reap massive benefits. This commentator thinks that high prices for pork are a result of short supply, therefore anyone can sell all their pork at a premium price. The government is even opening up the import meat market to try to reign in surging prices. However, when supply meets demand then not only prices will fall but also the competition between what many Chinese consumers see as better quality meat, i.e. imported from Canada etc. and locally produced meat will heat up. Shuanghui the owner of Smithfield has an aggressive advertising campaign in both TV and high profile locations advertising their ‘American imported’ Pork products.
If we look at the Chinese milk market we see that due to low confidence in locally produced milk the demand for imported milk products is strong, despite being more expensive than locally produced equivalent products.
Imported powder relies for the most part on its imported status as its ‘brand’ this implies better food safety than domestic production. As the local pork supply increases there is the risk that Chinese consumers who are becoming used to buy imported pork, will continue to do so at the expense of commodity domestic pork, especially if import prices remain stable. At that time it will be branded domestic pork that will continue to sell well and at a premium.
Currently that premium price is given to all domestic pork due to low supply, but in the future it will be brand positioning that brings this premium. I am interested to see which large scale producer, the only ones who can afford a large marketing budget, will succeed in their nationwide brand building. Perhaps those who have already built brands based on their other products will succeed first, or will a marketing orientated firm be the ones to accomplish this first for OEM pork? A chicken or egg first question?