Investors are betting on tight pork supplies and strong government support for China’s leading pork producers, causing shares to soar to record levels despite one of the worst disease outbreaks in years.
Reuters reports that livestock shares initially slid on the early outbreaks in August and September. But they have climbed since November, even as African swine fever (ASF) outbreaks continued and as transport curbs on infected provinces hit prices and hurt profits for most producers.
For example, shares in Muyuan Foods Co Ltd, the No. 2 pork producer, have doubled in the past six months. No. 4 producer Jiangxi Zhengbang Technology Co has jumped more than 20%, while fast-growing Tech-bank Food Co Ltd is up 143%.
Although listed companies only account for a modest proportion of China’s annual production of 700 million pigs, they are growing quickly as Beijing adopts modern farm techniques. The share price gains continue even as most companies have forecast a plunge in earnings for last year.
Last year, Muyuan produced 11 million pigs. Muyuan said its 2018 net profit slid 78% to $77.7 million, after prices fell partly because of ASF.
Analysts believe prices for live pigs have bottomed and could rise from $0.82 per pound currently to as much as $1.35 per pound in the second half as supplies drop and farmers try to restock farms.
“Prices could rise quite high, quite quickly,” said Xiong Kuan, analyst at Cofco Futures, who expects a 20% drop in supplies. Others say it could be as much as 30%.
The financial advantage will go to the larger producers with low-cost modern farms that are able to better fight disease, Reuters reports.
Supply Concern Continues to Increase
The Chinese government remains very concerned because much of its pork production comes from millions of small farmers whose farms are at the highest risk for ASF.
“The government sees very clearly, among all the cases of African swine fever, less than 20% took place on big farms. They are encouraging big farms with good biosecurity measures to expand production,” said Feng Yonghui, chief analyst at Soozhu.com.
Reports say China may divide its hog industry into five zones to stop the spread of ASF and guarantee pork supplies. China’s Ministry of Agriculture and Rural Affairs drew up a draft plan to ease the trade of pigs and pork within five regions, after earlier measures distorted prices and the market.
Each zone contains one of China’s top pig-producing provinces. The draft plan also encourages large-scale livestock producers to develop integrated production from breeding to processing across a whole zone.
The large companies are continuing to expand, looking at future bumper profits. Top 10 producer New Hope Liuhe produced 2.5 million pigs in 2018, up 50% from 2017. Muyuan raised $745 million in a share placement in December to add new farms for 4.8 million pigs.