To examine the advantages and disadvantages of business models, the analysis of the demand side and the supply side is indispensable. A good business model should have an advantage in product or supply, and a few businesses can have advantages at both ends, such as Coca-Cola, but this is not necessary, as long as there is a significant advantage at one end, it can achieve a very good business. The characteristics of monopoly, scarcity, differentiation, and leadership are generally said to be reflected in these two general directions.
This article examines the business model of pig farming from these two ends, answering the question of whether the pig industry is a good business suitable for investment.
Product and demand-side traits
Pork has the characteristics of homogenization, large demand, large demand rigidity, large price elasticity, and difficulty in forming inventory backlogs.
Homogenization
Pork is a homogeneous product in terms of products, similar to staple foods such as rice and flour, and it is difficult to achieve differentiation. Although when we pick meat in the farmer's market, we will regard the meat color as high-quality pork with a slight bright red color, no soft meat, no dripping, etc., but it is not difficult to do this, and most of the pork that passes the normal feeding, inspection and quarantine can be achieved.
It is difficult to further differentiate pork on the basis of freshness and safety. The market can also see high-end pork such as No. 1 earth pig and NetEase Weiyang pork, which is priced at 3-6 times that of ordinary pork. However, the meat quality of these high-end products is only slightly better than that of ordinary pork, and its high price and harsh requirements for feeding conditions have led to a small scale on both the demand side and the supply side. The vast majority of the more than 50 million tons of pork consumed by Chinese people every year is ordinary pork, and the proportion of high-end pork is very small. In addition, the current breeding body is still dominated by farmers, highly dispersed, and the stage of pork branding has not yet arrived.
Large demand & high demand rigidity
Pork is a necessity for people's livelihood, the demand is very large, half of the world's pork is produced and consumed in China. Professor Wen Tiejun said in his ten crisis lectures that China produces 600 million tons of steel and 700 million pigs a year, which is calculated to consume half a ton of steel per person and eat half a pig every year. Pork is a veritable just need, accounting for more than 50% of the meat structure of Chinese residents, since ancient times there is a "pig food in the world" saying.
The eating habit of consuming pork makes it difficult for pork to be replaced by beef, mutton and chicken. On the one hand, pork is obviously different from beef, mutton and poultry in terms of taste texture, and cannot be substituted for each other in cooking. On the other hand, the reproductive capacity, growth rate, and feed-meat ratio of pigs are far better than those of cattle and sheep (the feed-meat ratio of pigs is about 3:1, and the ratio of cattle and sheep is about 7:1), and the high production efficiency leads to greater pork production, more affordable prices, and is also more in line with the requirements of food security. China's diet structure and population size determine that pork will continue to dominate the demand for animal protein.
The price elasticity is large
Residents' rigid demand for pork has led to a large elasticity of pork prices. From an economic point of view, the demand curve of pork is relatively flat, and a small change in supply can cause a large change in price. If the pig price of 20 yuan / kg is regarded as the balance of supply and demand, then the pig gap reaches 10%-20%, the price can rise to 30-40 yuan / kg, the supply surplus reaches 10%-20%, and the price can fall to around 10 yuan.
It is difficult to form an inventory backlog
Chinese eat pork has the characteristics of fresh food. Generally slaughtered in the early morning, pork is marketed in the early morning and sold out in one day, which is what we call hot fresh meat. With cold chain logistics, cold fresh meat is also available, with a shelf life of up to one week. In addition, there are a small number of frozen meats, but freezing needs to occupy refrigerators and cold storage, and will lead to a decrease in the taste of pork, so frozen meat is only used as a supplement to fresh meat. In general, most of the pork is freshly sold, and the upstream slaughter and breeding is also oriented to the demand for fresh meat. This is different from the consumption habits of Europe and the United States, where a large proportion of pork consumption is pork products, such as sausages, bacon, cured meat, bacon and so on.
The characteristics of fresh food make it impossible to form a large inventory in the circulation of pork. In fact, the production link can not form inventory. Pigs are living creatures, to eat and drink, stock pigs need to occupy breeding sites, consume a lot of grain, water and electricity energy and labor every day, save a day to increase the cost of a day. Farmers generally do not sell a large number of pigs in order to increase the price of bo pigs. In fact, in order to maximize economic benefits, the time for pigs to come out of the pen is when the growth rate and feed conversion rate begin to decline, generally at 180 days old or about 110kg.
The same is a bulk, pigs are stronger than steel
The characteristics of large demand and small product differentiation directly classify pork as a commodity. If you compare pork with steel, you will find that although it is the same commodity, pork has more advantages than steel. Steel is mainly used in the production of fixed assets or durable consumer goods such as infrastructure, real estate, automobiles, home appliances, etc., these products have a long service life, and once the downstream is saturated, the demand for steel will drop sharply and continue to affect for many years. The characteristics of long shelf life lead to easy inventory overstock of steel, inventory affects the start of production, and the process of destocking is long and painful. Steelmaking is a heavy asset industry, fixed asset investment is huge, production capacity entry and exit are very difficult, resulting in the industry downturn period everyone is also consumed together, no one can move. Therefore, the overproduction of commodities such as steel is very terrible, and the end result is that the price cannot be sold.
Pork will also be overproduced, but not unsalable. Pork is a fast-moving consumer product, with the characteristics of repetitive consumption, and when there is oversupply, it can be quickly cleared by adjusting the price. Compared with steel, pig sales are still cash in stock, no arrears, no accounts receivable, and better operating cash flow. Coupled with the characteristics of fresh food, pork will not form an inventory, and the impact of oversupply is relatively short. Pig production capacity entry and exit thresholds are very low, many farmers will raise more pigs when the pig price is high, less when the pig price is low, the flexibility of production capacity is very large. When there is overproduction, as long as part of the production capacity is forced back by low pig prices, the pig cycle can bottom out. It can be seen that pork as a mandatory consumer product has the characteristics of stable consumption, and the pig cycle is only a price cycle, not a quantity cycle.
Pig cycle with big ups and downs
Homogenization, large market, rigid demand, no inventory characteristics, and then superimposed capacity in and out of the easy to cause a large fluctuation in the pork price cycle.
(Hog price trend)
Pig prices are about 4 years a complete cycle (from the low point of pig price to the low point, or the time span from high point to high point), and there will be several small pig cycles within the large pig cycle. Affected by inflation, the cost of raw materials, labor and energy at the production end has slowly risen, resulting in the price center of the pig cycle also gradually rising.
I said in "Makihara Shares I: The Pain of the Ternary System of the Pig Industry: Heavy Assets and Long Cycle" that it takes 22 months to start from the supplementary breeding sow to the incremental pig out of the pen (the ancestral pig breeding pregnancy is 4 months to produce the breeding sow, the breeding sow can grow to sexual maturity for 8 months, the breeding sow can be bred for 4 months to give birth to the commercial pig, the commercial pig fattening is 6 months out of the pen, a total of 22 months), or from the beginning of the reduction of the fertile sow, to the effect of the reduction to the pig out of the pen also takes 22 months. Each expansion and contraction takes about 2 years each, so a complete cycle of about 4 years is formed.
Farmers judge that pig prices have bottomed out, immediately "step on the accelerator" to supplement the breeding sows, 22 months later to see results, when everyone's production capacity began to cash, pork is excessive, pig prices began to fall. If the judgment of pig prices peaked downward, immediately "step on the brakes", cut the breeding sows, but also 22 months later to see results, then everyone's capacity contraction effect is reflected, pork began to shortage, prices recovered. The pig replenishment cycle is long, and this cobweb cycle that can never catch up has been "teasing" farmers.
(Cobweb Cycle)
The current round of pig cycles that began at the end of 2018 is a special pig cycle with big ups and downs. Due to the impact of African swine fever, the bottom of the pig price in 2018 was delayed for several months, and the dematerialization of production capacity was much greater than in the past, so in 2019 and 2020, the pork gap was very large, and the pig price soared to the sky and fluctuated sharply at a high level. The high point of this round of pig prices (40 yuan) far exceeds the high point of the previous cycle (21 yuan).
The high pig price immediately stimulated the enthusiasm for breeding, and people ignored the rising cost of breeding, ignored the threat of non-plague epidemic, and frantically supplemented the fence in order to enjoy the unprecedented high pig price feast. The greed of human nature is infinitely magnified by the super pig cycle, the crazy expansion of production in a race, the three-yuan seed retention, the high-priced purchase of piglets, breeding pigs, and even illegal vaccines are all brushed up. The cost of radical fence repair was revealed after the cycle flipped, and the pig price fell from 36.8 yuan / kg in early 2021 to 10.5 yuan / kg during the National Day. The costless replenishment has led to a significant increase in the average cost of the industry, from 14 yuan to around 18 yuan, and the pig price is much lower than the average cost of the industry for most of 2021.
Although from the rearview mirror, the pig price is a 4-year cycle, but it is impossible to predict the trend of pig prices. Within each cycle, it is affected by many factors such as industrial policy, epidemic situation, and environmental pressure, and the fluctuation amplitude and rhythm of the small cycle within the large cycle are irregular. Farmers who predict pig cycles often fall into cycle traps.
The question of value investing
If you first see the characteristics of the pig industry: traditional industry, homogenization, low barriers to entry, and high prices, will you think this is a bad business? Not only is the cyclicality too strong, but the low barrier to entry leads to too fierce competition, is this a value-destroying industry?
If we draw conclusions on this, I am afraid it will be premature. We should ask what farmers can do to win in the face of huge markets, homogeneous products and fluctuating price cycles.
Trying to navigate the cycle is obviously a stupid idea, and the only way out for large markets, homogeneous commodity producers is to reduce costs. If a producer has a production capacity below the average cost of the industry, he can make excess profits. A deeper thinking is whether this low-cost advantage is exclusive, how high is the threshold for this advantage, whether it can be overcome, and whether the cost gap between the same industry and him will widen or narrow in the future.
These are the soul questions of value investing. The biggest fear in the business world is what you will do, and so will others. No matter how important a thing is, if enough people can do it, it can compress the level of returns near the producer's subsistence line. Competition is the number one villain in the investment world, a value shredder and a wealth terminator. Investors seeing this "wealth terminator" should immediately tighten their wallets and hide away. Interestingly, once the identity is changed, the impression changes immediately. As consumers, competition is simply an amiable, charitable philanthropist, always making goods cheaper, innovating endlessly, and making our lives better.
A good business should have a "unique skill" on one side, relying on this exclusive expertise to keep competitors out. Obviously, homogeneous pork is difficult to play tricks on the product side, and can only seek a breakthrough on the supply side. Farming practitioners are a bunch of price takers, without pricing power, and their way out is also very clear, just so-called:
No way to enjoy the premium,
Only the cost of death,
Digging inward three feet,
Plan out excess profits.
Supply side: Pig raising needs to be accounted for
Everyone on the earth knows that pork is a homogeneous commodity, and the key to raising pigs is to control costs. But what are the cost items and how to control them? What are the rigid costs that cannot be compressed, and which are the costs that can make a difference? Is there a difference on the cost side, and is the threshold for low-cost technology high? If low-cost technology is easy to imitate, then the supply side will not escape the fate of homogenization, and pig breeding will inevitably become a mediocre business like Berkshire Textile Factory.
Let's briefly sort out the elements that feed and raise pigs well. For the sake of simplicity, the fattening link is used as an example, and the issue of breeding seedlings will be discussed later.
In the inherent impression, raising pigs is very simple, it is a very low threshold thing, for farmers is zero threshold, as long as four walls on the homestead and a roof is a pig barn, and then feed the pigs food and water. This is the original solution for raising pigs, which we have kept for thousands of years.
Pigs are living creatures, and careful analysis shows that pigs need to be invested in the following factors: water, food, air, shelter, epidemic prevention and medical treatment, and labor.
Water: Clean and plentiful
Food: Nutritionally balanced and adequate
Air: Clean (excessive manure and breeding density may lead to excessive ammonia, carbon dioxide, and dirty air)
Residence: comfortable, clean, warm in winter, heatproof in summer
Epidemic prevention and medical treatment: clean environment (reduce the source of infection such as bacteria and viruses), vaccines, drugs and effective treatment when sick
Labor: labor consumption such as feeding, water feeding, cleaning, disinfection, etc
It is not difficult to provide good conditions for pigs in the above aspects. If you don't consider the cost, there are many solutions to make pigs grow better. Comparing the elements needed for the health of a person's life, it is almost the same as the above. Because people are the end, not the means, we do not consider the cost when we achieve a healthy and comfortable life, such as in order to prevent cold and keep warm, there is heating in winter, air conditioning in summer, there is no upper limit on nutrition, deliciousness and luxury in food, and medical treatment is even more costless, health first, life first.
But pig raising can not be regardless of the cost, pig raising must be calculated economically. For example, pigs grow better in a warm winter and cool summer environment, but if the pigs are air-conditioned for this, the cost is too high, and the farmer will lose a mess.
Farmers need to strike a balance between input and output, that is, between the input of improving feeding conditions and the resulting increase in pork output. Reduce costs as much as possible while ensuring output, and maximize output when cost is certain. The evolutionary history of the pig industry is the history of constant accounting for inputs and outputs.
At any stage of development, it is easy to improve the breeding conditions at any cost, but it will lead to the loss of control of the input-output ratio, and there is no economic benefit to speak of. Therefore, the high-input, high-output production method is not necessarily better than the low-input and low-output mode. The key is whose input-output ratio is better.
Comfort zone for traditional farming
The original solution was an excellent low-input, low-output model. It is lackluster in providing the conditions for the growth of pigs, and the conditions of the pig house, food, feeding methods and other aspects are relatively backward. But its input is the lowest: food can take advantage of local conditions, and home-grown crops, pasture, potatoes and even leftover swill water are all cheap and usable feed. Pig houses naturally have advantages, their own homestead does not cost money, and the construction cost of simple pig houses is low. In terms of epidemic prevention, because of the low breeding density, the difficulty of epidemic prevention is not large, and the epidemic prevention measures are sloppy and can be passed, and there is not much need to spend money. In terms of labor, there are many people in rural areas who are cheap and have rich pig management.
This original solution has low costs in terms of land, pig houses, labor, feed, etc., which I call the factor low cost model. The advantages of this model are low cost, the disadvantages are extensive production methods, path dependence problems are prominent, equipment, technology and funds are difficult to enter, and the potential to improve breeding efficiency is limited. This model remains at this stage a comfort zone for both free-range and corporate farmer models.
The factor low-cost model is a product of the current situation of rural productivity and production relations in China, which is brought by the countryside. To enjoy its benefits, it is necessary to maintain the status of rural free-range farmers, and changes in production methods will lead to the loss of original advantages. Once the scale of free-range farmers is large enough, they will find that the elements of self-production are not enough, the land needs to be bought or rented, the pig house needs to be rebuilt, the labor force needs to be hired, and the feed needs to be purchased.
Scale is not economical and the real threshold of pig raising
Once the cost is large, it will rise and lose its original advantages, which is the scale of the pig industry is not economical. The factor low-cost model is a threshold for China's pig industry, and industrial farmers cannot cross this threshold and cannot gain a foothold in the pig industry. Another threshold for pig raising is the pig cycle of big ups and downs, sometimes making big profits and sometimes huge losses, resulting in capital not daring to enter easily.
These two thresholds have built an invisible moat, the river is wide and deep, the river is cruising with sharks, crocodiles, and periodically rolling up storms, and in these years, the pig industry has relied on it to block the invasion of capital outside the industry and the expansion of capital in the industry. So-called:
Wanda, Goldman Sachs, Country Garden, a group of big guys looked at the pig and sighed.
Zhengbang, Tianbang, New Hope, a large number of veterans of the gutter overturned the ship.
This is what I often say, it is not difficult to raise pigs, the threshold for raising pigs is very low, but the threshold for low-cost pigs is very high, the threshold for large-scale low-cost pigs is very high, and large-scale low-cost pigs want to expand rapidly, and the threshold is higher than the sky.
The break of industrialization
Only by breaking the dilemma of uneconomical scale can the industrialization of pig breeding be realized. The essence of economies of scale is insufficient technical level. The industrialization and modernization of pig breeding is not a choice between low input, low allocation, low output, and high input and high output, but to seek a breakthrough in the dilemma to achieve medium input, high allocation, high output, or even low input, high allocation, and high output.
Few farmers are willing to be so committed to technology. The first reason is that the upgrading of breeding technology is too difficult. The evolution of the breeding model is not a single link, a single technology can be done, it is the evolution and replacement of a complete set of solutions, which requires the continuous accumulation of multiple links and dimensions and a large number of micro-innovations.
Because pigs are living creatures and very fragile, improvements in breeding techniques often involve the whole body. Technological advances often require process reengineering and lead to increased management difficulties. For example, in order to improve epidemic prevention, the use of all-in and all-out feeding process will put forward higher requirements for the operation of the farm layout, internal division of pig houses, disinfection, pig transfer, personnel entry and exit, etc., and the management level of breeders must be improved, otherwise it will not be able to support the upgrading of technology.
Industrial pig breeding is a high-tech industry that integrates multiple disciplines, from the aspects of breeding, breeding, feed, pig house, epidemic prevention, environmental protection, breeding enterprises need to have genetics, breeding, nutrition, veterinary medicine, environmental science, informatization, artificial intelligence, architecture, engineering and even aerodynamics.
Take the pig house as an example, the pig house is the aircraft carrier of the modern breeding industry, is the carrier of all technology, and is not a simple building with four walls and a roof in the stereotype. As the daily residence of pigs, the quality of the pig house directly affects the economic benefits of pig raising. Pigs live comfortably, will have strong immunity, good appetite, reproductive ability, long meat speed will be better, and feed, material consumption is lower. The location layout of the pig house, the environmental control in the house (temperature, humidity, light, ventilation, pathogenic microbial control, etc.), manure treatment, biosecurity prevention and control, etc. all need to be done well, and the direction of the flow of people, pig flow, wind flow and even manure flow should be arranged. Especially with the rise of the scale of single farming, the complexity of the entire system will rise exponentially, and if any link is not done well, the overall efficiency will be pulled down, and it is very difficult to take into account many aspects.
Therefore, the design of the pig house is a very delicate work that requires industrial precipitation. For example, taking into account ventilation and heat preservation is not an easy task, you need to consider the flow of air, so that the pigs in each pen breathe fresh air, but can not let the temperature drop too much, especially for nursing houses and nursery houses, but also consider humidity, pathogenic microbial control, energy saving and other factors, the design of ventilation systems is very complicated.
In addition to the difficulty of technological upgrading, there are two important reasons that hinder farmers from taking the route of technological upgrading: one is the pig cycle with great ups and downs. This price fluctuation continues to stir the speculative minds of farmers, making it difficult to maintain concentration. In particular, the factor low-cost model itself has the flexibility to enter and exit, which facilitates speculation. The second is that industrial breeding is a heavy asset industry, pig houses, etc. need a large amount of pre-capital investment, and can see returns in the later stage, and the heavy asset attributes seriously restrict the expansion speed.
Human nature likes to make quick money, unwilling to give, unwilling to wait. Who is willing to pay huge amounts of money in advance, but also to die of massive technical problems, but also to watch other speculative farmers make a lot of money, this is simply a living sin. However, if a company adheres to the long-term doctrine and chooses this difficult road, it will have advantages that other farmers can't match over time, the threshold of technological leadership will be built high, and the moat will be wide and deep.
New capacity replaces old capacity
In the future, it belongs to industrial aquaculture enterprises. The first step of industrial breeding enterprises is to use the dividends of technology to make up for the cost of technology itself, and to align with the traditional breeding model in terms of total cost in order to survive. The second step is to transcend the traditional model through technological advancements and begin to replace traditional production capacity on a large scale. The third step is to significantly open up the gap through informatization, automation and intelligence, and eventually eliminate traditional production capacity.
Now, the second step is underway.
summary
Finally, to summarize the situation on the supply side of the pig industry:
1. There are obvious differences in the cost of the supply side.
2. The factor low-cost model is the moat and comfort zone of traditional farmers, which has both advantages and path dependence, and has limited potential for cost reduction.
3. The low-cost model of factors is also the threshold and stepping stone of industrial aquaculture, which can open the ceiling of uneconomical scale after stepping over, and there is still great potential for technological improvement and further differentiation in the follow-up.
Conclusion: The pig industry is an industry that can achieve cost differentiation. It's a good business, a long slope with thick snow.