China's pig farmers, notorious for fostering damaging boom-bust cycles that can cause prices to whipsaw, could be forgiven for feeling gloomy: the 'swine' flu epidemic triggered a global consumer aversion to pork, just as feed prices rose and the Chinese economy slowed.
But against the odds, this summer farmers appear to have refrained from a widespread cull, as a small government stockpiling initiative and growing hope about the outlook revived prices from a two-year low in May, returning farmers to profit.
While that's little comfort to U.S. pork producers reeling from a 23 percent slump in lean hog futures to a more than six-year low, it has important implications for demand for imported soybeans, half of which are crushed into soymeal used to feed livestock in a country that consumes half of the world's pork.
Demand for the soymeal and corn that goes into pig, chicken and fish food will fail to rise this year after surging ahead at 7 percent a year on average this decade, but most of that slowdown was concentrated in the first half of the year, with a rapid rebound in store that will support imports, analysts say.
A government stockpiling scheme and hopes for fatter times ahead encourage pig farmers to maintain their herds.
"In the hog and poultry sector, re-stocking over the past few months has been below expectations, which resulted in a fall in feed consumption," said Jean-Yves Chow, a Hong Kong-based industry analyst with Rabobank.
"It's first time in decades that there will be almost no growth. But the second half will be better as they are having a general recovery, so consumption of meat should be better and it will be more attractive for farmers to invest in inventories."
The China National Grain and Oils Information Centre expects consumption of soymeal -- the protein-rich raw material for animal feed produced after extracting oil from soybeans -- to rise 3.15 percent to 29.5 million tonnes this year. It grew by 11 percent last year, as the economy galloped ahead at nine percent.
While the improving China market will do little to revive slumped global pork prices given a U.S. import ban, it does help explain China's continued appetite for imported U.S. soybeans, despite a nearly 30 percent surge in first-half imports that most analysts expected to slacken sharply in the second half.
Just as Beijing rushed to rescue its metal sector and farmers by stockpiling excess supply to support prices, it has done the same for swine farmers, setting out in June to buy up to 120,000 tonnes -- tiny compared to the nation's annual output of more than 40 million tonnes, but still a turning point for breeders.
Since falling to a two-year low of 14 yuan per kilogram in May -- a level considered barely break-even for most of the industry -- retail pork prices have risen 11 percent, encouraging swine farmers to raise more livestock, particularly in the run-up to the National day and mid-autumn festival holidays in October.
Now, breeders can make profit of 100 yuan per head.
"Livestock market is recovering as the government stockpiling of pork has spurred pork prices," said Zhang Hong, an analyst with a feed consulting firm www.efeedlink.com.cn.
"Better profit will encourage breeders to restock more, and more holidays in coming months will also spur meat consumption."
And more livestock means more feed, demand for which fell sharply after China's economy was rocked by the closure of factories and job losses of millions of migrant workers.
HALF THE WORLD'S PORK
The bigger story of China's growing demand for pork remains largely intact, as the increasing wealth and urbanisation of its people fuels more consumption of higher-protein foods like meat. Producing that requires still greater volumes of high-protein grains, particularly soybean, imports of which already account for around 70 percent of China's total demand.
For a graphic of China's monthly soybean imports, click on: http://graphics.thomsonreuters.com/059/CN_SOYFC0509.jpg
Chicago Board of Trade soybean futures have risen nearly 11 percent this year after months of surging Chinese imports; expectations for a sharp slowdown in second-half demand have been called into question after U.S. trade data showed brisk Chinese purchases for shipment in the new marketing year that begins in September.
The slump in Chicago pig futures this year -- making them the second-worst performing major commodity -- has put a spotlight on the growing plight of pig farmers.
But China's pork industry -- the world's biggest as the country's 1.3 billion people consume half of the world's 98 million tonnes of pork a year -- refrained from repeating the disastrous cull in 2007 amid the spread of blue-ear disease, when subsequent pork shortages caused prices to surge by 50 percent.
China needs about 410 million live hogs, including 41 million sows, for the market to be in equilibrium, according to the National Development and Reform Commission (NDRC), a central planning agency. Official data showed that China had 447.2 million live hogs and 48.3 million sows at the end of June. In July, the country had 450.06 million live hogs and 48.06 million sows.
Commerce Ministry data shows 17.2 million pigs were culled in July, returning to May's level after reaching 17.4 million in June.
Even though pig culling this year has risen by around 30 percent, it still a tiny portion of the total population.
For graphic on swine population and animal feed production: http://graphics.thomsonreuters.com/089/CN_PIGS0809.gif
The improving demand picture emerges just as supply-side constraints begin to drive soybean prices back towards the nine-month high they hit in June.
U.S. soybean crop faces threat from an early frost in September and in China the oilseed crop is parched in the main growing region, which has driven traders to build weather premiums into prices.
Imports by the world's top soybean buyer surged 28 percent to 26.5 million tonnes in the first seven months of the year, the NDRC estimated full-year imports at 40 million tonnes, suggesting a sharp deceleration in the second half -- which may now be less severe than expected.
"Soy imports in the coming months will not be as high as previous months, but still China's own production is expected to fall, while U.S new crop is estimated to be high," said Hong.