Recently, the National Bureau of Statistics released data showing that at the end of the third quarter, the national breeding-sow inventory stood at 3602 ten thousand head, equivalent to 96.0% of the control target of 3750 ten thousand head. After seeing this figure, some market participants concluded that capacity regulation had been “successfully completed” and began to form optimistic expectations that hog prices would rise sharply next year. Based on a comprehensive assessment of supply and demand fundamentals, we believe that the supply contraction resulting from this round of decline in the breeding-sow inventory will be relatively limited. If, while hog slaughter numbers have yet to decline year on year and producers have yet to return to profitability, market participants collectively take a bullish view of hog prices or even expand production counter to market conditions, the supply-demand outlook will be unlikely to improve. Hog prices could then remain depressed for a prolonged period, further worsening the situation for farms and producers. The industry must remain rational and should not set excessively high expectations for the market outlook.
On the supply side, continued improvements in industry production efficiency have largely offset the impact of the decline in the breeding-sow inventory. Data show that over the past five years, industry PSY has increased by around 3% per year on average, while PSY at leading large-scale pig farms generally exceeds 30 head, enabling more piglets to be produced from the same sow base. At the same time, the slaughter weight of hogs has continued to rise, increasing the amount of pork produced per animal. This reflects the pattern of “fewer sows, no less pork”: the pressure on actual pork supply has not eased significantly as a result of the contraction in the breeding-sow inventory. In addition, frozen pork inventories are currently high. If hog prices stage a temporary rebound, slaughtering companies and traders will quickly release frozen products, adding to market supply and directly limiting the scale of price increases.
Constraints on the demand side are also pronounced. Overall, end-consumer demand for pork is currently weak. Consumers have a wider range of meat options, and the substitution effect from poultry, beef, and mutton continues to strengthen, putting pressure on total pork consumption. In the first 3 quarters of this year, China’s poultry production grew by 9.3% year on year, while poultry prices were broadly unchanged from the same period last year. This indicates significant growth in poultry consumption, further squeezing the room for pork consumption. In addition, the demand boost from traditional holidays has weakened considerably. In recent years, the phenomenon of “a peak season that is no peak season” has recurred, and holiday stockpiling has provided only limited short-term support for demand, making it difficult to sustain a sharp rise in hog prices.
Overall, the industry should abandon the habitual approach of relying solely on the number of breeding sows on hand to predict a cyclical reversal, and objectively assess the complex combined effects of multiple factors, including production capacity and output, production efficiency, frozen-product inventories, and meat consumption. Once the industry forms a uniformly one-sided optimistic expectation that hog prices will rise in the future, it could easily trigger the fallacy of composition and repeat the mistake of misjudging the market before this year's Mid-Autumn Festival and National Day holidays. We recommend that farming households and farms continue to make reasonable production plans, avoid blindly restocking and expanding capacity, and refrain from extreme stockpiling in a bet on market prices, in order to guard against business risks caused by deviations in expectations.
Author: Wang Zuli
Member of the Expert Advisory Committee on Monitoring and Early Warning for the Pig Industry, Ministry of Agriculture and Rural Affairs
Researcher at the Institute of Agricultural Economics and Development, Chinese Academy of Agricultural Sciences