China's appetite for pork

Thursday, October 10, 2013

Earlier this year, a Chinese-based company shook up North America by buying its largest pig farm, Smithfield Foods, for US$4.6 billion. What does this mean for Ontario pork producers?

by DON STONEMAN

When Hong Kong-based Shuanghui Holdings Ltd. announced its intentions to buy Smithfield Foods in late May, the pork spotlight was focused sharply on China. The largest pork producing – and consuming – nation in the world wants more pigs and more pork and was willing to buy the biggest pork producer in the United States to get them. So what are the opportunities for producers in Canada?

Back in 2000, Maple Leaf Foods' plants became the first in the world to be approved to ship pork to China. But the purebred swine industry has a much longer history of shipping to the People's Republic. Here in Ontario, long-time swine breeding stock exporter Gord Waters utters a note of caution. He has too much experience in this particularly tough export market to get excited.

"China has been big for about 30 years, the land of opportunity," he says, but the culture and politics have limited these opportunities. "It is still not an easy market to crack and that is the struggling point. Yes, there are 1.6 billion people there that need to eat, but we haven't figured out a way to work with them."

Waters's Alliance Genetics Incorporated exports pigs for Alliance Genetics Canada, which bills its 13 breeders as the largest genetic supplier in Canada, with 8,000 sows. Other exporters shipping to China buy their pigs from Alliance, Waters says.

Alliance hired an agent and opened an office in China three to four years ago. "That is important for the Chinese market. You've got to be connected," Waters says, but China can eat up your resources and "cracking" the Chinese market would take everything Waters has; exports to 49 other countries would suffer.  

The relationship with Chinese buyers has changed, says Waters. First, the Chinese wanted to buy pigs, then they wanted to do joint ventures, "and that didn't work." Now, they want to buy American and Canadian companies. (Waters allows that a member of a Chinese trade delegation recently asked if his company is for sale.) So the purchase of Smithfield is part of "a new way of thinking they have in their approaches," Waters says.

Jim Long, CEO of Manitoba-based genetics company Genesus, is more optimistic about the prospects. Genesus produces swine breeding stock in Western Canada, the northern United States, Russia, the Czech Republic and China.

Long says Chinese government officials expect the country will have to import a minimum of 10 per cent of its pigs, and perhaps 20 per cent. That's 60 million to 120 million hogs a year. The higher number "is basically North America's hog production," he points out.

The Chinese central government's challenge is to feed the country's growing population and that challenge is huge, says Cornell University researcher Mindi Schneider, author of a 2011 report on the Chinese pork industry. (An update will be published this fall.) Chinese want more meat, she says. As recently as the 1970s, meat was rationed in China.

Schneider recites a list of statistics that are staggering. Chinese authorities are attempting to feed 21 per cent of the world's population on nine per cent of the arable land. Per capita pork consumption in China is 37.1 kg/person and rising. There are 700 million pigs in China, about one pig for every 2.5 people. In 2010 farmers and pig companies produced more than 50 million tonnes of pig meat, half of all the pork in the world, most of which was consumed domestically. That's twice the pork produced in 27 EU countries combined and five times the amount produced in the United States. Shuanghui's wholly owned packing arm, a separate entity, is among the largest pork producers in China with an annual slaughter capacity of 30 million hogs.

To feed those pigs, China was the world's leading soybean importer in 2010, buying more than 50 million tonnes from the United States and Brazil. Along with soya, 1.3 million tonnes of corn were imported from the United States, a relatively small amount compared to total Chinese corn production of 168 million tonnes in 2010-2011. But that year, for the first time since 1994-95, China was a net corn importer rather than an exporter. Domestic feed demand has been increasing eight per cent annually for the last 10 years.

So why did Shuanghui (also known as The Shineway Group) buy Smithfield? Shuanghui wants Smithfield's good record on food safety, says Schneider. Something that made Smithfield attractive was its plan to have 50 per cent of producers quit using Ractopamine by September. China banned Ractopamine in 2002, considering it a threat to human health. Chinese companies continued to manufacture it for sales overseas until that was stopped in 2011. Schneider notes that China shares the position of the EU, India, the Russian Federation and others, voicing opposition to the minimum residue standards adopted by Codex Alimentarius (the food safety standards arm of the World Health Organization and the Food and Agriculture Organization of the United Nation) in July 2012 and calling for an all-out ban on the additive's use. There are 26 countries that approve its use, Canada and the United States among them. Despite their continued use of Ractopamine, the United States is still perceived as a cleaner market. "Food safety is the number one concern," says Schneider. Shineway has been at the centre of food safety scandals before. The Smithfield purchase could be a way for them to clean up their image or to differentiate themselves in the market.

Disease outbreaks also take their toll. Farmers sell into black markets where diseased or dead pigs are butchered. Schneider says it was a crackdown on the butchering and sale of dead pigs that led to the discovery of the dumping of thousands of pigs into a river in Zhejiang province earlier this year. Food safety is a key factor in China, where there are so many unsafe-food scandals.

Waters says the considerations of the Chinese are different than for other markets. They aren't interested in quality issues. They just want pigs. Waters says he walked a recent Chinese delegation through a discussion on genomics, SNPs, and other indicators of high pork quality. Waters says he was told that quality wasn't as important to buyers as the number of pigs. Nevertheless, Ontario Swine Improvement, based near Innerkip, in Oxford County, is sending its genetics to China in the form of semen, says Marlowe Gingerich, operations manager. "From my side of the fence (as a purebred producer) it looks a little grim," Waters says. "Because the Chinese now have a cheap source of food maybe they don't want to expand their farms. But I don't see that happening either. There are so many people there that no matter how many Smithfields they buy, they still can't produce enough food."

Don't expect things to change at Smithfield with the new ownership, Waters adds.  "The Chinese want things to run business as usual. They just want access to all the food.

"I just think they are going to limit how much food is going to stay in the U.S. and that opens opportunities" for Canadian packers such as Maple Leaf and Quality who want to export to the United States.

Long is bullish on North American prospects as the supplier of choice for China – by process of elimination, Long says. Europe isn't cost competitive in the export market because its animal welfare environmental and antibiotic rules are so strict. Brazil's pork production is growing, but so is its own pork demand.

Most important is the price of hogs, considerably higher in China than in the United States and Canada. In mid-August, the live weight price in the United States was $56.55 per hundred pounds. In China, says Long, the hog price was US$115 live weight pound. That is $125 a hog higher in China than in Ontario. It's no wonder that food costs as much as 45 per cent of a family's income in China (47 per cent in rural areas, 37 per cent in urban.)

Disagreeing with Waters, Long asserts that Chinese breeding stock buyers are looking for high-tech pork. "They know that to be competitive long term they have to bring in technologies . . . to improve productivity.

"They have no genetics that are competitive so they are looking around the world," buying from PIC, Hypor, Danbred and, he adds, his own company, Genesus.  

Yorkshire, Landrace and Duroc (pork breeds familiar to Ontario producers) have taken over, supplying about 95 per cent of the nation's pork.

According to Schneider, the first national survey of livestock in 1960 revealed there were more than 100 indigenous pig breeds in China. Economic policy changes came in 1978. Schneider says as late as 1985, "backyard farmers" with five pigs or fewer produced on half an acre produced at least 95 per cent of China's pork. Change came as subsidies and policies in China favoured larger producers. Government subsidies reimbursed farmers for housing, acquisition of breeding hogs, vaccination programs, breeding, and for feed.

A USDA Economic Research Services report published in February, 2012, entitled China's Volatile Pork Industry, outlines a series of subsidies available to larger pig farmers but not to smaller ones: free immunization against PRRS, foot and mouth disease and classical swine fever. There was a subsidy for artificial insemination using semen from Duroc, Landrace and Yorkshires, financial awards to large farms with at least 500 sows and also to standardized production zones, including villages, where backyard operations were pooled together. The report says the subsidies were targeted to 326 counties that account for more than 40 per cent of China's pork production.

The USDA report quoted the China Ministry of Agriculture Livestock Industry Yearbook indicating that about half of the pork slaughtered in China in 2010 came from "backyard farms" raising fewer than 50 hogs a year. These specialized household farmers are the sector's fastest-growing group. Large farms are growing but, Schneider says, "not as fast," despite the policies and subsidies that support them. Yet the Chinese government wants the smaller producers out of the business, Waters says. A better market for Canadian breeding stock is the mid-sized and larger farms. Yet, China's challenge isn't just to match a growing population; it needs to maintain the pork production it has.

Schneider is not a fan of the expansion of the big farms. She says small farms utilized the manure that pigs produced as fertilizer; the large ones treat it as waste, and serious pollution results. The USDA reports the Chinese Ministry of Environmental Protection identified livestock waste as the chief source of water pollution in China and quotes a census that shows there were 94 hogs for every 100 acres of cropland nationally in 2008, four times the U.S. level. In Sichuan, Hunan, and Guangdong Provinces, the ratio exceeds 200 hogs/100 acres and the USDA report notes the ratio is exceeded in the United States only in North Carolina. Iowa, by contrast, has 82 hogs/100 acres. Can China raise more pigs, or will it have to get pork from elsewhere to feed its population?

And then there's disease. PRRS hit China hard in 2006. With every disease outbreak, there is a market shortfall months later.

"China's pork industry is constantly buffeted by a range of influences, including disease epidemics, feed prices, policy interventions, seasonal consumption patterns, demand for other meats, and macroeconomic factors," says the USDA report. "Pork prices in China tend to rise and fall in multiyear cycles as the industry expands and contracts." The degree of volatility appears to have increased after record-high pork prices in 2007 prompted extensive government intervention and a surge in private investment accelerated structural change in the industry. Imports fluctuate in a similar manner.

Between 2000 and 2006, China and Hong Kong combined imported less than one per cent of the pork consumed in those countries. But that has changed as well. (See chart page 9)

Schneider notes that China's strategic pork reserve, the only one in the world, is a reminder of the role of the central government and the need to quell unrest. The countercyclical system buys up and freezes pork when prices are low and releases it into the market when prices are high. The goal is to prevent extended low prices that might trigger a large sow cull that would prevent expansion months later, something that happened in 2007. The trigger is a hog-corn price ratio and producers are subsidized to maintain, rather than liquidate, their sow herds. Cities are ordered to maintain reserves of pig meat equivalent to either seven or 10 days of consumption. When prices are too high, frozen pork is released into the market and low-income consumers are subsidized. The USDA says this program was enacted in 2009, but failed to quell high prices during 2010 and 2011.

Long doesn't put much stock in the statistics or the planning or, in fact, any numbers that come out of China. The only thing he counts on is the price of a market hog. According to the USDA, "we estimate that prices in the Chinese market would have to be approximately 30 to 45 per cent higher than U.S. prices for U.S. pork to be cost competitive in China." It certainly looks as if those prices are higher now.

Schneider doesn't know what to expect with the Shineway purchase of Smithfield, but she thinks change will occur soon. She cites widespread packer overcapacity and speculates that China will import pigs instead of pork. Or maybe the Smithfield Foods purchase is just part of an overriding strategy to feed China's people.

According to press reports, Maple Leaf Foods turned down an offer to be purchased by Smithfield Foods last spring. That report nearly coincided with the negotiations to purchase Smithfield. If the Maple Leaf purchase had gone through, it would be a Chinese-owned company also. BP

What Shuanghui bought:
Based in Smithfield, Virginia, Smithfield Foods bills itself as the world's largest hog producer and is credited with developing three site production systems. Its hog production segment consists of 851,000 sows producing 15.8 million hogs annually in the United States from 460 company-owned farms, and contracts with 2,100 family farms across 12 states. Smithfield's pork segment bought approximately 49 per cent of its U.S. live hog requirements from the hog production segment in 2012, but also from Maxwell Foods Inc. and Prestage Farms Inc., and other hogs are bought daily
at southwestern and midwestern processing plants.

There are three wholly owned U.S. fresh pork and packaged meats subsidiaries, Smithfield Packing, Farmland Foods and John Morrell. The pork segment produces a wide variety of fresh pork and packaged meats in the United States and markets them nationwide and to numerous foreign markets, including China, Japan, Mexico, Russia and Canada. Hogs are slaughtered at five midwestern plants and three southeastern plants with a capacity of 110,000 hogs a day.

Hogs are processed at 32 other plants into fresh and processed foods. Total processing in 2012 was 27.7 million hogs. Fresh pork sales totaled 3.8 billion pounds. Packaged meat sales totaled 2.7 billion pounds.

In addition, Smithfield Premium Genetics, the company's own specialized lean pork line, produced 15 million hogs. Pork sales were more than US$13 billion in 2012. Hogs produced were worth $3.1 billion. There were 46,000 employees, including those in foreign operations in Poland, Romania and the UK. BP

What is Shuanghui?
Shuanghui Holdings (also known as The Shineway Group) owns a production arm that slaughters more than 30 million pigs annually, according to Schneider's 2011 report. Sales of fresh and frozen meat exceeded US$7.6 billion in 2010. One of Shineway's shareholders is leading global investment banker Goldman Sachs, based in New York City. Schneider says it's almost hard to say that Shuanghui Holdings is a truly Chinese company; there are so many outside interests with a piece of it. BP