Can venture capital disrupt the pig cycle?

After the sharp price peak due to outbreaks of African swine fever, the pork market in China has been under pressure for almost a year now. At the end of 2019 and the beginning of 2020, the price peaked several times above €5 per kilo of live weight. The quotation for live pigs has now been around €1,90 per kilo for months. Although insiders have long expected that production will contract - as is expected in a trough of the pig cycle - the reality is proving more unruly. One possible reason is that an increasing share of pig production is in the hands of large conglomerates. 

Companies in fact 'forced' to continue to produce
An analyst from market research firm China-America Commodity Data Analytics points out that 20% of China's pig production is now in the hands of listed companies. Five years ago, this was only 5%. These companies are able to raise cheap capital and regularly invest in their own feed production and slaughter capacity. Often investments are made in the light of multi-year plans that are not set aside 1-2-3.

Figures show that the top 10 largest publicly traded pig companies increased production by no less than 43% last year. These companies delivered 7,6 million pigs in February. Last year in that month there were 'only' 5,3 million and in February 2020 even only 2,2 million. A signal that the largest pig producers will not allow themselves to be influenced by negative market conditions. Dutch insiders confirm that the growth of the sector is with the large companies. The medium-sized and small (family) businesses suffer relatively more from the difficult market conditions.

Although fewer new-build plans are now being realized by the large companies, according to the analyst, there is no question of phasing out production. It is reported that reducing pig production leads to loss of face for management and increases the risk of pressure on stock prices. In addition, the companies must continue to run production to meet obligations. This does not only concern financial burdens, but also agreements with local authorities about, for example, deferring taxes and creating employment.

Exports continue to be under pressure
For the exporting sectors in Europe and the United States, the Chinese market therefore seems to offer fewer and fewer points of departure for this year. It is increasingly in line with expectations that the export volumes remain under pressure stand. In February, the import volume of pork - on a monthly basis - was already 73% lower than during the peak in March 2021. The volume of imported by-products was 33% lower. The sizeable livestock also creates a strong demand for raw materials, which can have a price-increasing effect on feed prices.

The large influx of investors into the Chinese pig industry is causing the normal historical pattern of the pig cycle to be somewhat disrupted. However, the time-honored logic of this cycle also means that the large companies ultimately expect improvement 'automatically'. The deep pockets of the large companies mean that production can be expanded even in severely loss-making circumstances. It remains to be seen how long the parties can keep this up. For now, capital has patience.