China is the place for profit!
Intensive, western-style production units in China are enjoying enhanced levels of profit despite seeing a significant rise in their input costs
In round figures, there are 1 billion pigs on our planet. About half of them are located in China. Only 5 years ago, China was looking to become a pig exporting nation. Now in 2008 it has become a major importer. What are the economics and factors that have driven these major changes?
Like most countries, China now suffers inflation pressures derived from commodity-related issues, particularly in food and energy supply. The overall annual inflation rate in China rose in 2006 to 4%, well above the then benchmark 3.4%, and it continued to rise so it was at 5.9% in November 2007 and reached 8.5% by March and April 2008. Rising food prices were the main contributor to this, up by 23% from a year earlier, while non-food prices rose only 1.6% in this period. Within the food price rises, vegetables accounted for 22% and grains (rice) another 6%, but meat (largely pork) was responsible for 49%.
Pork is the number one meat of cultural choice for Han Chinese, regularly accounting for 70% or more of the meat products eaten. Between 85-90% of the pig carcases produced are consumed as freshly slaughtered and butchered cuts, prepared in a wide range of recipes. Many of these chosen cuts and dishes confer specific meanings to the meal, such as the consumption of pig trotters prior to a journey and of pig-head skin soup for a celebration.
Even with the country's official policy of one child per family, the further growth of the population (already over 1.3 billion people) will combine with the urbanisation of many more meat consumers in China to further increase this strong demand for fresh pork. Population growth alone would account for a projected pork demand increase of 4% per year. The urban-enhanced incomes would account for a further 3%. In other words, current trends would allow for pork consumption in China to grow at an annual average rate of 7%.
As Figure 1 shows, however, since 2005 there have been major problems in the internal Chinese pork supply to meet this demand. Recent reductions in pork supply have been caused by a series of issues affecting pig production in China. Farmers in all countries tend to be reluctant to discuss their actual costs of production, farm-gate prices and other issues. Chinese farmers are no exception, therefore the analysis of typical figures for production values may often be made only by central administrators.
The federal Ministry of Agriculture in China publishes freely-available figures for pig farm-gate prices, weaner piglet prices and retail prices (these can be found at website www.agri.com.cn). Its month-by-month charts are based on figures supplied by provincial authorities and have been regularly used by internal experts and also outside bodies when discussing pork supply and prices in China. Chinese pig experts also like to use a trend line based on the pig price divided by the grain price as a rough measure of profitability.
Interpreting the figures
Some problems can occur with interpretation of these basic figures. One is the fact that they are averaged across the entire Chinese industry, which is not homogenous. Small backyard and family farms still form a large sector, probably 50-60% of production. But the breeding and farming of western-style pigs and intensive pig farming methods has been encouraged and has dramatically increased across China in the past 10 years. It has risen from only 20% of total national production in 2000 to over 40% now.
The costs and supply issues for each sector—backyard, family or intensive—vary widely. Besides these variations among types of production, there is considerable variation around different parts of China in prices along the pork chain. The pig industry in the prosperous south-east provinces around Guangzhou, and the mid-eastern provinces around Shanghai, has a large western-style farm structure with higher prices all along the pork chain. Pig production in other provinces is generally of a lower input and price structure, with lower technical standards, particularly in the north-east. Any agriculture ministry figures, such as for farm-gate price, could therefore differ widely from the reality for a particular farm situation.
Local consumer sources supply some comparison data for intensive pig and pork prices across south-eastern China in the past few years. Figure 2 compares the monthly figures given in the Ministry of Agriculture website since 2000 to ones from these other sporadic sources. This chart indicates that the ministry's overall consolidated reports have somewhat underestimated the farm-gate prices in the south-east China region in recent years, particularly in the more recent, rising-demand situation.
A view of production costs
Cost of production estimates for the same period obtained from local producer sources suggest that producing each kilogram of finisher pig in eastern China has increased from RMB7 in 2006 to a current RMB10. Of course, most of the rise is due to increased cereal feed costs. However, the rate of increase of production costs has not been as fast as for farm-gate prices, which are being pushed higher by the macro-factors of growing demand and lower supplies. This has meant that some pig units have achieved outstanding profit levels, even up to the equivalent of US$100 per pig marketed.
So it is really a great time to be an active major pig producer in China, unlike the situation in many other parts of the world at present. Note also that a typical production cost per kilogram in China can often be only half the amount found in Europe or the USA because of less expensive labour and lower charges for finance and taxation.
It should be made clear these prices and costs refer to the intensive, western-style farming sector. There are also over 40 local pig breeds in China, supplying a wide range of other pigmeat products. Any significant meat retail outlet in China will stock hams derived from Jinhua pigs alongside whole roast pigs of small Xiang breeds and the popular fatty pork obtained from various local breeds such as the Su Tai. While each of these products has a specific price structure, the overall level of their retail prices also is increasing rapidly. For example, the chi taw or whole pig-head skin product has increased from RMB10 to RMB15 in the past year.
A huge number of small backyard farms still remain, now chiefly supplying local rural markets. Each of these rural backyarders typically sells only 5-10 pigs per year, usually earning RMB80-100 per pig. These comparatively low farm-gate prices are offset for the farmer and his family by the negligible input costs (these pigs are fed waste products) and the strong asset protection provided by these livestock. PIGI
(NEXT: Pork production challenges in Chinasee September 2008 Pig International)