Pork Commentary – October 22, 2014 – China Visit

Pork Commentary

Jim Long President – CEO Genesus Inc.

info@genesus.com October 22, 2014

China Visit – Leman Conference Xian

  • The last several days we have been in China.Our Report and Observations.
  • By price China is currently 19.8 RMB per kilogram liveweight, give or take that’s $1.10 US liveweight a pound. This is around breakeven for China producers.
  • Corn in China is $10.50 US a bushel. This drives up cost of Swine production.
  • The Chinese Government has about 5 billion bushels of corn in storage. Government policy is to subsidize corn production. The last two years that has been in the neighborhood of $30 billion dollars. With ownership by the Government of such corn reserves we expect GMO issues will continue to keep importation of corn and DDGs extremely limited. Simple math: you own 5 billion bushels at $10.50 a bushel or about $50 billion in value. US domestic corn is $3.00. China we strongly believe will not be importing corn and DDG’s anytime soon.
  • China had about 48 million sows in inventory. Official Government statistics show that the sow inventory has dropped about 5 million sows in the last year. Losses were in the $70 per head range for a significant amount of time. It appears to us that China’s production is at the beginning of lower hog numbers. We expect by the first part of 2015 to see greater effect from liquidation with hog prices increasing to $1.30 US liveweight a pound. At that time we expect increased pork imports mostly form US (Smithfield owned by Chinese WH Group) and from European Union continues currently shut out of Russia due to sanctions. All of Brazil’s excess production is going to Russia currently.
  • Data we have seen has China’s average producer marketing 14 hogs per year per sow. If liquidation has taken out 5 million sows, we expect that at least 50 million fewer market hogs per year.
  • Customers and producers we met with all talked about the terrible economic conditions for swine production in the last 15 months.  They are optimistic for improvement but with feed costs extremely high, optimism is tempered.
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  • Genesus had a customer meeting prior to the Leman Conference. All Chinese Genetic Production Units were invited. We had Chinese speaker Dr. Scott Dee from Pipestone Group, Government Officials, and Genesus Genetic updates. Each Genesus production unit presented their current audited results. It was good to see all farm production results over 25.6 pigs per sow weaned and boar growth sales in 135 day range. The Genetic team is working hard to achieve Globally Competitive results, and it is good to see their efforts paying off.
  • The Leman Conference was well attended. Organized by the University of Minnesota the largest Chinese production companies attending. There were probably 60 exhibitors.
  • Two of the largest American companies attending were Pipestone and Carthage Group. Both companies are already big in the US are finding a large market for veterinarian support and production. Disease is a huge problem in China. The need for experienced expertise in large scale integrated systems is insatiable. No one has more experience in scale production than these US production experts.
  • People ask us why China’s not importing more pork or other trade when the cost of production is so high. The reason is as simple as food security. China wants to ensure that it doesn’t depend on other countries for its food. Last week we read that many of the Swine Government officials know what hunger means from their childhood. They experienced the real pain of hunger. It’s a powerful motivation to ensure as leaders that your people don’t have to experience that. Food has social, political, and economic considerations in China that we as westerners don’t really understand.
  • The Economic pressures on pork production is leading Chinese producers to look for technology from American companies. Pharmacy, equipment, genetics, nutrition, vet, or management the need to increase productivity is leading to opportunities for many companies. The Chinese have a tremendous respect for America and American knowledge and understanding of scale.
  • SummaryWe expect the massive liquidation of 5 million sows in China will lead to a price expansion in the coming months. China will need to import pork to meet the needs of 1.3 billion people. When that happens it will support North American and European hog prices. We believe Lean Hog Futures are undervalued in 2015 relative to export demand we expect to see.  
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