Zhong Zhengsheng et al.: Pig futures prices rebounded, and a new round of pig cycle inflection point signals or have appeared

　　Zhongxin Jingwei November 12 Title: Pig futures prices rebounded, a new round of pig cycle inflection point signal or has appeared

　　The author is Zhong Zhengsheng Chief Economist of Ping An Securities and Director of the Research Institute

　　Lu Zhang Senior Macro Analyst at Ping An Securities

　　Benefiting from the storage policy and short-term improvement in supply and demand, hog futures prices have rebounded since the end of September 2021. According to data from the Dalian Commodity Exchange, the price of the main pig futures contract rose from 13.6 yuan / kg at the close of September 23 to 17.5 yuan / kg on October 27, an increase of about 29% during the period, and then adjusted since October 28. At the same time, short-term supply and demand also have a certain improvement: on the one hand, due to the downturn in prices, there is a certain degree of pressure on the breeding end, and it is planned that the second fattening will wait for the arrival of the peak consumption season in the fourth quarter; on the other hand, the low pork price and the rapidly rising vegetable price have stimulated the short-term consumption of pork to a certain extent, and after the weather has cooled, there is also a certain pre-position in the winter seasonal demand for cured bacon.

　　However, the current pig supply as a whole is still in a state of excess, and the recent price rebound does not mean the start of a new round of pig cycle rise. This paper looks for the starting signal of a new round of pig cycle rise in history, and combines the special features of this pig cycle and the seasonal effect of pork prices to determine the inflection point range of the pig cycle.

　　First, the law of the pig cycle: the starting signal of a new round of rise

　　1. Long-term leading indicators: changes in the stock of fertile sows

　　Changes in the stock of fertile sows are a long-term leading indicator of cyclical price changes in pigs. From the perspective of pig breeding cycle, after breeding sows, after 4 months of "pregnancy - calving - lactation" period, plus 6 months of piglet fattening period, can affect the pigs after 10 months, and then affect the future changes in pork prices. Therefore, the decline in the stock of fertile sows leads the rise in pig prices.

　　However, the de-industrialization of fertile sows is a long and iterative process, and the length and magnitude of the decline in the stock is different in each cycle. Even if the stock of fertile sows has begun to decline, it is not simply possible to conclude that a new round of pig price increases in the coming year will be launched.

　　In the process of downward and oscillation of the pig cycle, accompanied by short-term fluctuations in prices, the expectations of farmers are constantly changing. Superimposed on the "disposal effect" of fertile sow assets, the industry's production capacity has been in a downward trend for a long time. As pig prices fall to near the break-even line, farmers tend to prioritize the elimination of older, low-PSY (referring to the number of weaned piglets that each sow can provide per year) in favor of young binary sows with higher production efficiency. At the same time, producers who lack cost advantages withdraw from the market, and the concentration of the industry increases. Therefore, the structural adjustment of fertile sows will bring about an increase in the efficiency of unit breeding, which can make up for the impact of the decline in stock to a certain extent.

　　2. A more direct and effective signal: the market clearance under the deep loss of farmers

　　Starting from a new round of pork prices, pork prices since the beginning of 2006 can be divided into four cycles (Figure 1). From our research, the length of each round of pig cycle downward and grinding period varies greatly, but there is still a signal to be found at the end, that is, farmers have deep losses and accelerated production capacity clearance.

　　Figure 1 Historical pig cycle (2006-2021)

　　In each round of the cycle, the market-oriented production capacity clear signal caused by the deep loss of farmers is the key to determining the length and magnitude of the decline in the breeding sow stock. The reason is that when the profits of pig farming are still fluctuating in a narrow range near the break-even line, farmers are not very pessimistic about future pig prices. When the price decline or the outbreak of the epidemic causes the breeding industry to fall into deep losses in 3 months and above, short-term reproduction faces greater cash flow pressure, which leads to the bankruptcy of a large number of farmers and promotes the acceleration of pig production capacity.

　　Second, the current round of pig cycle: the inflection point or in July-August 2022

　　1. The signal of capacity acceleration has appeared

　　In the process of this round of pig price decline, the high-cost purchased piglet breeding has been losing money since March 2021, and the relatively low-cost self-breeding pig breeding has also lost money since June 2021. The rapid decline in pig prices has broken through the cost line of the vast majority of farmers in the industry. Therefore, the preconditions for the current deep loss have been reached, and the "domino" of dematerialization has been touched, but it still takes time from the de-pollination of fertile sows to the pig out of the pen, and the start of a new round of pig cycle needs to be patient.

　　2. The head pig enterprises have borrowed debt to expand, and the downward cycle pressure is not small

　　The traditional view is that the pig breeding industry leader represented by listed companies has a strong ability to resist risks, and its profitability in this round of super pig cycle is considerable, with capital and scale advantages. The promotion of large-scale breeding may lengthen the downward dematerialization time of the pig cycle and reduce the fluctuation of the pig cycle.

　　However, in this round of pig cycle, breeding enterprises have accelerated their debt expansion under the stimulation of high profits, and are facing greater cash flow pressure in the downward price of live pigs since 2021. At the same time, African swine fever has also increased the cost of pig breeding in large pig farms, and the cost advantage of large-scale production has been inhibited.

　　In the downturn in pig prices since 2021, some pig breeding enterprises have fallen into losses, but investment cuts have lagged behind, relying heavily on financing to alleviate financial pressure.

　　At present, the productive biological assets of listed pig enterprises have tended to decline since the first quarter of 2021, and the high probability of fertile sows in head pig enterprises has been dematerialized for three consecutive quarters. Considering the trend of increasing industry concentration, the biological assets of the five major listed companies (fertile sows) tend to expand for a long time, and their recent contraction reflects the pressure of the industry's capacity destocking under the pressure of debt. Therefore, the high profitability and the promotion of large-scale breeding in the early stage cannot lengthen the dematerialization time of the current pig cycle.

　　3. Ternary sow high storage, or delay the inflection point appearance time

　　Ternary sows are sow breeds that are hybridized from three breeds, and binary sows are hybridized by two breeds. The former tends to grow fast and have a high lean meat rate, while the latter has an advantage in reproductive performance.

　　Affected by the retention of ternary sows, the time lag of this round of pig cycle from the de-fertilization of fertile sows to the destocking of pigs may be slightly later than the historical law. In the traditional pig breeding cycle, the pigs can be bred 10 months after breeding, and the pigs are ahead of the changes in pork prices for about 1-2 months, so the decline in the stock of fertile sows leads the pig price to rise by about 1 year. However, the significant difference between this round of pig cycle and previous rounds is that when African swine fever broke out, there was a serious shortage of binary sows in China, and farmers used ternary sows to keep breeding as fertile sows in order to speed up the replenishment of the fence. However, the PSY of ternary sows is low compared to the binary sows introduced abroad. Historically, the initial stage of industry de-industrialization will often give priority to the elimination of elderly binary sows, and this round of capacity de-industrialization will be the first to eliminate ternary sows with lower production efficiency.

　　In the short term, although the breeding sow inventory has declined, the industry's overall PSY has improved, or will extend the de-industrialization process of the pig inventory by 1 to 2 months.

　　4. Seasonal effects may boost price increases in July-August 2022

　　In addition to the four- to five-year cycle brought about by the supply of live pigs, the change in pork prices is also affected by the small cycle of seasonal supply and demand mismatch during the year. From the statistical law of 2010 to the present, the probability of pork prices rising from July to September and december to January of the following year is higher. Among them, the price of pork from December to January of the following year tends to rise under the impetus of the strong consumer demand for pickled bacon in winter and during the Spring Festival, while the high price in the middle of the year is more due to the low survival rate of piglets in winter, corresponding to the reduction of piglets after half a year.

　　Based on the historical law of the pig cycle, combined with the discussion of the two special places in the current pig cycle, "high storage of ternary breeding sows" and "debt expansion of head pig enterprises", we believe that the year-on-year growth rate of the breeding sow inventory from June 2021 will decline, which means that the pig out of the barn in June 2022 is expected to decline, and the impact of the seasonal law and the adjustment of the structure of the breeding sow inventory, July and August 2022 may become the inflection point of the pork price. (Zhongxin Jingwei APP)

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