Is China’s Hog Rebuilding Complete? Reconciling Inventory and Price Data

By Xi He, Dermot J. Hayes, and Wendong Zhang

The African swine fever (ASF) outbreak that started in August 2018 wiped out 40% of China’s sow inventory. China has been making substantial efforts, including subsidizing large hog producers and encouraging industrialization and modernization of hog production, to rebuild and expand its pork production (Xiong et al. 2020). While China’s governmental inventory data as of December 2020 show sow and hog inventory were 92.1% and 93.1% of their respective 2017 levels (MARAC 2021), recent record-high piglet, sow, hog, and pork prices suggest a large persistent supply shortage. China’s record pork and live swine imports in 2020 suggest that China’s hog rebuilding might be fast but of low genetic quality. Specifically, it seems likely that the retention of low-quality commercial generation gilts helped rebuild the herd but set back the national breeding system by abandoning purebred grandparents and parent generation propagation (Dim Sums 2021).

Prices from the newly launched live hog futures market in January 2021 show that traders expect high prices into 2022. We predict that as of January 2022, China’s hog inventory will be 290 million head and monthly hog slaughter will be 14.5 million head based on estimated inventory-price elasticities and the relative change in live hog futures price for deliveries in January 2022 ($1.92/pound) compared to average hog prices in 2017 ($1.30/pound). Our predictions are lower than the average 350 million head hog inventory and 18 million head monthly hog slaughter in 2017, which indicates a weak recovery of hog inventory and slaughter into 2022.

Inventory and prices of hog, sow, piglets, and pork

Figure 1 shows China’s officially reported monthly sow and hog inventory and hog slaughter from January 2016 to December 2020. Inventory began to recover at the end of 2019, and the pace has accelerated, especially in the second half of 2020. By the end of 2020, reported sow and hog inventory reached 92.1% (41.6 million head) and 93.1% (407 million head) of 2017 levels, respectively. Reported monthly hog slaughter also rebounded quickly in June 2020 and was close to the pre-ASF level by 2020.

However, prices have not reflected the inventory and slaughter recovery, which makes market analysts question the credibility of the progress reported by the national inventory statistics. As figure 2 shows, weekly piglet, sow, hog, and pork prices have actually increased since 2019, and both piglet and pork prices are still much higher than the pre-ASF levels. While both piglet and pork prices showed a modest decline at the end of 2020, both rebounded quickly in early 2021, partially due to the growing pork demand during the Lunar New Year. The upward trending prices indicate that hog slaughter is still lagging behind consumption demand.

First-ever live hog futures

To create a transparent pricing system and reduce hog price volatility, China launched its live hog futures on the Dalian Commodity Exchanges on January 8, 2021. When contracts for pig deliveries become available in September 2021, November 2021, and January 2022, China and the United States will be the only two markets to trade hog futures. Live hog futures prices reflect informed traders’ expectations. The daily live hog futures price through February 10, 2021, shows a slight upward trend, indicating that traders are not expecting lower hog prices in the near future (see figure 3).

Figure 2 also includes hog futures prices on February 10, 2021, for contracts with maturity in September 2021, November 2021, and January 2022 (shown as dots on the right-hand side). The futures price for January 2022 contracts have been relatively stable at $2/pound, much higher than the average 2017 price of $1.30/pound, indicating futures traders are not expecting hog prices to drop significantly into 2022.

If we assume that the futures prices are an accurate reflection of the expected supply and demand situation for each maturity month, we can calculate how much recovery traders expect. Using monthly hog prices from January 2017 to December 2020, our estimation yields a hog price elasticity of -0.49 for hog inventory and -0.62 for hog slaughter. Using the average hog inventory of 350 million head, monthly average hog slaughter of 18 million head, and average hog price of $1.30/pound in 2017 as the projection baseline, we predict that traders expect China’s hog inventory and monthly slaughter will be 290 million and 14.5 million head, respectively, as of January 2022, which is lower than the officially reported 407 million and 20.6 million head, respectively, as of December 2020. This suggests a much weaker recovery of hog inventory and slaughter into 2022.

Multistory hog buildings

China has been using various policies to rebuild and expand its hog inventories, including subsidizing large hog producers. In December 2019, China’s Ministry of Natural Resources and Ministry of Agriculture and Rural Affairs announced that farmers could use multistory buildings for hog production, and surging investment in multistory hog buildings followed. Guardian (2020) provides a good example of a hog building.

Figure 4 shows the distribution of hog building projects across China’s provinces as of 2020. Table 1 lists the distribution of these projects across provinces. While leading hog firms are planning more than 60 projects, most of them are located in southern China, especially in Guangdong, Sichuan, and Zhejiang provinces (Xinmunet 2020). Severe land restrictions in the south, where population densities are higher and industrial activities are more concentrated, is one reason for this geographical distribution pattern. The 60 planned projects have a production capacity of 20.24 million hogs, and the 34 projects already under construction have a capacity of 16.38 million hogs (Xinmunet 2020). Thus, these projects will expand hog production capacities and accelerate China’s hog industry consolidation and modernization.
 

China’s hog rebuilding has important implications for affordable pork consumption and feed grain and meat exporters. While inventory data show that hog and sow inventory has reached more than 90% of pre-ASF levels, high piglet, sow, hog, pork, and live hog futures prices indicate the reported recovery in inventory and slaughter recovery may not have translated into ample pork supplies. High futures prices into January 2022 indicate that we will likely see continued high pork prices and pork import demand into 2022.

China has been adopting various policies to expand hog production, including subsidies and the approvals for multistory hog barns. These programs will ensure that Chinese pork production will eventually recover.

References

Dim Sums. 2021. “China Swine: Build Back Faster, Not Better.” Dim Sums, February 14, 2021.

Guardian. 2020. “A 12-storey pig farm: has China found the way to tackle animal disease?”

He, X., D.J. Hayes, and W. Zhang. 2020. “China’s Agricultural Imports under the Phase One Deal: Is Success Possible?” CARD Policy Brief 20-PB 29. Center for Agricultural and Rural Development, Iowa State University.

Ministry of Agricultural and Rural Affairs of China. (MARAC). 2021. (in Chinese)

Xinmunet. 2020. (in Chinese)

Xiong, T., W. Zhang and C-T Chen. 2020. “A Fortune from Misfortune: Evidence from Hog Firms’ Stock Price Responses to China’s African Swine Fever.” CARD Working Paper 20-WP 602. Center for Agricultural and Rural Development, Iowa State University.

Footnotes

1. In September 2019, China’s government subsidized hog producers with 500–900 hogs with 0.2 million RMB, 1000–1999 hogs with 0.4 million RMB, 2000–2999 hogs with 0.6 million RMB, and 3000+ hogs with 0.8 million RMB. ↩

Suggested citation:

He, X., D. Hayes, and W. Zhang. 2021. "Is China’s Hog Rebuilding Complete? Reconciling Inventory and Price Data." Agricultural Policy Review, Winter 2021. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=117.