Rising grain and input prices spurred by the war in Iran have raised the cost of animal feed in China, placing further pressure on pig producers in the world’s largest pork market who are already contending with weak demand and pork prices at levels not seen in 16 years.
Since the conflict began on February 28, futures for two primary feed components - soymeal and corn - have climbed to multi-month highs on the Dalian exchange. Analysts point to several contributing factors, including an oil price rally, higher freight rates and increased fertiliser costs, which together have lifted commodity futures and spot prices.
In March, spot prices within China for soymeal and corn rose by over 200 yuan per ton and roughly 100 yuan per ton respectively - equivalent to about 7% and 4% increases - driving up real-time feed expenditures for producers. Prices for other feed inputs have also shown sharp moves: lysine and methionine, fishmeal and vitamins A and E have risen between 6% and 77% in March, according to Rosa Wang, an analyst at Shanghai JC Intelligence Co.
"Prices for most raw materials used in animal feed have experienced a significant increase in March, partly driven by the ongoing conflict in the Middle East," said Lin Guofa, senior analyst at consultancy Bric Agriculture Group.
Market pain meets overcapacity
Producers in China, which account for roughly half of the world’s pigs, are confronting these higher input costs while pork prices fall because of overcapacity and sluggish demand. China’s most-active hog futures contract dropped to a contract low of 9,980 yuan per ton on Monday. Physical cash pork prices have tumbled to 9.69 yuan per kg - the lowest level in 16 years, according to JCI.
Lin calculated that current production economics are negative for many farms: "Raising a hog that weighs about 60-62.5 kg currently costs 12.2-12.5 yuan per kg. This means farmers lose 280-350 yuan for each pig they sell." Those losses reflect the gap between rising feed and input costs and deeply depressed pork receipts.
Vulnerability of smaller producers
Smaller-scale farmers, who produce less than 30% of China’s pigs, are particularly exposed to price swings and risk being forced from the industry, analysts warn. "For small farmers now, either you sell your pigs cheap or you grit your teeth and bear it, get through this price drop, and then wait for the pig price to rebound," said Fu Zhenzhen, a feed analyst at Beijing Orient Agribusiness Consultants.
Li, a hog producer with 600 head in northern Hebei province, said he has been operating at a loss since last year. "We are being roasted by fire now. Pork prices are so low, but feed costs have jumped sharply in March," he said, describing the pressure at farm gate level.
Policy measures and the outlook
Chinese authorities have increased efforts since last year to address overcapacity in the sector, urging breeders to reduce sow numbers and better manage slaughter rates. The government has also made purchases of frozen pork for state reserves to try to stabilise prices. At the end of December, China’s sow herd stood at 39.61 million head, which remains above what authorities consider the normal holding level of 39 million.
Looking ahead, industry analysts say the future path of pork prices will hinge largely on how forcefully companies cut herds. "Going forward, pork prices will mainly depend on how aggressively companies trim their herds," said Pan Chenjun, senior animal protein analyst at Rabobank in Hong Kong.
Exchange rate used in price comparisons: $1 = 6.8915 Chinese yuan renminbi.