Pig prices were sluggish in 2023, and the industry continued to lose production capacity. The direction of the 2024 cycle became more clear. The direction of prosperity was more important than the short-term price pace, and if you look at it, the prospects are becoming more and more bright.
The Zhitong Finance App learned that Guotai Junan released a research report saying that the US pig breeding industry began to experience large-scale development in the 1970s and 80s. The efficiency of the industry improved, the division of labor in the industry was gradually refined, and the upstream and downstream industrial chains were integrated. Reviewing the US pig industry and looking at the changing trends in breeding in China, the bank believes that pig prices will be low in 2023, the industry will continue to lose production capacity, and the direction of the 2024 cycle will become more clear. The direction of prosperity is more important than the short-term price pace. Looking ahead, the 2024 cycle is improving, and the breeding sector is recommended from a beta perspective.
The US pig breeding industry began to experience large-scale development in the 1970s and 80s. The efficiency of the industry improved, the division of labor was gradually refined, and the upstream and downstream industrial chains were integrated. Cathay Pacific Junan Agriculture Zhong Kaifeng's team reviewed the US pig industry, looked at changes in breeding trends in China, and drew the following 5 major inferences:
China's large-scale process may take another 10 years
Judging from the large-scale progress, the large-scale pig breeding process in China can be compared to the US in the 80s and 90s. The large-scale process may take 10 years. The scale-up of Chinese farms began in 2007, and is currently in the final stages of large-scale implementation in the US to the beginning of the acceleration phase. 1) Looking at the number of farms: From 2007 to 2010, the number of farms in China dropped from 82.35 million to 2010, a decrease of about 76%; in the US, by 1982, the number of farms dropped by about 86%. 2) Judging from the average number of records held per game: The average number of stocks held in China rose from 6.4 in 2008 to 22.4 in 2021, which is about 2.5 times; the average number of entries in the US increased 3.7 times from 1954 to 1978.
Will pig farming profits be marginally profitable in the end?
Actual farming profits may be higher than expected. By analyzing the farming profits of farmers covering different breeding stages in the US, the total profit of each fattening pig in the industrial chain exceeds 200 yuan in terms of cycle and year. That is, the industry has reached a mature stage, and there is still a high average net profit from farming.
Can we use US farming profits to anticipate profits from Makihara, Wen's and other companies in the future? The bank believes this will undervalue the profits of leading Chinese aquaculture companies. The reason is that the US breeding industry has a detailed division of labor. Pig breeding farms, nurseries, and fattening farms each carry out their duties, and the businesses of Makihara, Wen's cover all businesses in the breeding industry chain, so leading companies in the industry such as Makihara and Wen's should measure the average profit of the entire US pig industry chain.
Which farming model is better?
Judging from the historical development experience and data of the United States, the detailed division of labor between delivery and weaning piglets/2-month-old pigs adapts to the development of the US breeding industry, and the detailed division of labor has also promoted a larger scale of farming under this model, while the proportion of the full-process self-care model between delivery and delivery is gradually decreasing. The bank believes that the US farming model, which has a more detailed division of labor, has lower capacity requirements for farmers and contractors, and is more tolerant of biosafety prevention and control capabilities.
Different prevention and control measures for the farming epidemic determine the differences in farming models between China and the US. There are several models in China's farming industry: group farms have a “company+farmer” and a self-breeding model, and family farms have an outsourced piglet fattening model. There are industry differences between China and the US. Farming prevention and control in Europe and America is mainly culling and purification. China's aquaculture prevention and control prevention and control is different. After the outbreak of African swine fever in 2018, Muyuan introduced a series of prevention and control measures at self-breeding farms to maintain production capacity. Self-breeding farms initially had favorable conditions for centralized mobilization and strict control. Therefore, judging from the group market, it is impossible to measure the advantages and disadvantages of the “company+farmer” and the self-breeding and self-supporting model.
Will there be no pig cycle in the future?
Or how will the pig cycle change? The pig cycle will always exist, and its amplitude may still be high. The existence of the pig cycle is related to the “cobweb model” of economics, and the difficulty of predicting future pig prices, 10 months of pig growth time, and retail investors that always have a cycle will keep pig prices in the “cobweb model” cycle.
Whether the extended cycle time in the later stages of the US pig cycle and the increase in the number of cycles bottoming out will be tested in the Chinese farming industry, it is necessary to observe the increase in breeding concentration in China and the average household storage scale in the future. I think the actual conditions of agriculture and farmers in China are different. Free-range farmers will still be flexible in entering and leaving the industry in the future. As for the rise and fall of the pig cycle, they are still an important factor affecting supply, so China's pig cycle will not necessarily fluctuate at the bottom for a long time and increase in the number of times it bottoms out.
Slaughterhouse or farm, which link can get more profit in the industrial chain?
The profits of the US pork industry chain are basically in the hands of food companies. Food companies first master the slaughter process, open up consumption channels, and then acquire upstream breeding companies. This is the case with companies such as Smithfield, Triumph, and Hormel, that is, the profits in the US pork industry chain are controlled by slaughterhouse/food companies.
China will probably open up profits from the industrial chain by farming enterprises downstream. Chinese dietary preferences determine that slaughterhouse/food companies' products are limited. 50% of the meat protein in Chinese consumers comes from pork, and a significant portion of it is hot fresh meat. The preference for hot fresh meat determines that condiments or processed pork products cannot become the main form of pork consumption. Therefore, the profitability of most slaughter and pork food enterprises in China is lower than that of similar enterprises in the US. Judging from the current gross margin and profit of the industry, the aquaculture side grasps the source of farming and accumulates profits to develop downstream, which may be the future development trend of the industry.
Risk warning: 1. Agricultural product prices fluctuate greatly: feed costs account for more than 50% of breeding costs, and agricultural product prices fluctuate greatly, which will affect the stability of breeding costs. 2. Extreme climate risk: Extreme climatic effects such as extreme cold or floods will disrupt normal farming operations.