(Report producer/analyst: Qian Hao, GF Securities)
I. Introduction
Since the beginning of the year, pig prices have continued to be sluggish, the industry continues to be in a state of grinding bottom loss, the average loss range of the head is basically maintained at 200-400 yuan / head, since the decline of the pig cycle in 2021, the industry has accumulated losses of more than 15 months. However, unlike previous cycles, even if pig prices continue to lose money and financial pressure continues to accumulate, piglet prices are still in the profit range, reflecting that farmers are still relatively slow to reduce production capacity.
According to data from the Ministry of Agriculture, the national breeding sow inventory fell by about 2.4% from January to April. Due to the lack of external factors in this cycle, capacity adjustment mainly relies on the initiative of farmers to adjust, and farmers are expected to have an aggravated impact on the cycle.
The current cycle is in a stalemate where the industry continues to lose money but the production capacity is slow, and this paper will study and analyze the impact of farmers' expectations on the cycle from the perspective of game theory, and the possible path for the industry to break the current deadlock.
Second, how to understand the current "prisoner's dilemma" in the pig industry
(1) "Prisoner's dilemma": the rational behavior of an individual leads to the irrationality of the group
The prisoner's dilemma is a representative example of a non-zero-sum game, in which the police arrest two suspects, A and B, and interrogate them separately. Among them, both A and B remain silent, that is, "cooperate with each other", then both are sentenced to 1 year in prison; If both A and B report each other, that is, "mutual betrayal", both will be sentenced to 8 years in prison; If one of them pleads guilty and testifies against the other party, and the other party remains silent, i.e. "one cooperates, one betrays", the prosecution party is immediately released and the silent party is sentenced to 10 years in prison.
At this point, each prisoner finds confession to be his optimal strategy:
1. When prisoner B confesses, the sentence of A confession = 8 years < A silent sentence = 10 years
2. When prisoner B is silent, the sentence of A confession = 0 years < A is silent = 1 year
Therefore, each participant chooses to report the other, and the balance of the game falls on both prisoners choosing to confess. The prisoner's dilemma theory reflects that the individual's best choice is not the group's best choice, i.e., an individual's rational behavior can sometimes lead to group irrationality.
(2) Industry dilemma: farmers continue to lose money, and production capacity is relatively slow
At present, the pig breeding market is facing the "prisoner's dilemma" of continuous losses in the industry, but the production capacity is not smooth. In the game of the pig breeding industry, the goal of each farmer participating in the game is to pursue the maximization of individual interests, that is, to earn more breeding profits and occupy a larger market share, because there is no significant difference in pigs out of the slaughter, so the current pure self-interest strategy of farmers is to maintain or even increase their own production capacity.
Specifically, suppose that there are only two farmers A and B in the current market. Among them, the income of A and B to de-capacity is (+1, +1); The benefits of neither A nor B reducing production capacity are (-2, -2); A reduces production capacity, B does not reduce production of the benefit of (-4, +2); B reduces production capacity, and the income of A without reducing production is (+2,-4). In this case, for each participant, the optimal strategy is to refuse to reduce the aquaculture capacity, that is, to achieve the dominant equilibrium when neither A nor B dematerializes the capacity.
In fact, each farmer could have made a profit by reducing capacity in the process of competition, but the actual situation is to not lose market share, even if everyone in the industry continues to lose, capacity reduction is still slow, resulting in each participant falling into the "prisoner's dilemma".
Third, under the background of scale and informatization, the expected capacity of aquaculture groups is improved
(1) Informatization continues to improve, and farmers are expected to lead to cyclical alienation
With the continuous improvement of rural informatization, farmers have increasingly rich information acquisition channels, which enhances farmers' ability to anticipate subsequent pig price quotations.
According to the China Internet Network Information Center, the domestic rural Internet penetration rate increased from 27.5% in 2013 to 57.6% in 2021, and the number of domestic rural Internet users has exceeded 280 million in 2021, and the popularity of streaming media platforms has also expanded the channels for farmers to obtain industry-related information.
At present, the industry is caught in the dilemma of unsmooth capacity reduction, reflecting the expected capacity of farmers and the alienation of the cycle. Looking back at the past cycle, most of the breeding groups dominated by retail households did not have the ability to predict the cycle, and adjusted the production capacity according to the current pig price, so after the breeding fell into a loss, the farmers chose to eliminate the sow production capacity.
At present, the breeding groups with medium-sized farmers as the main body have a certain ability to expect the pig price market, and the farmers determine the capacity adjustment based on the expectation of the future market. Since the beginning of the year, there has been a significant divergence between piglet prices and pig prices, and piglet prices have continued to be in the profit range under the state of breeding losses, reflecting the industry's general expectation of subsequent pig price rebound, and the production capacity is slow, indirectly lengthening the cycle.
(2) The proportion of large-scale farms has increased, and the flexibility of industry capacity adjustment has decreased
Under the condition of large-scale pig breeding industry, the structure of farmers has changed significantly, which is an important reason for the stalemate of the industry. In recent years, capital has poured into the pig breeding industry, and capital expenditure in the industry has increased significantly. Taking listed companies as an example, in 2020, the year-on-year increase in capital expenditure of listed companies was generally more than 120%, and the year-on-year growth rate of fixed assets was generally more than 30%.
The influx of capital has accelerated the integration of the industry, the structure of domestic pigs has changed significantly, and the proportion of large-scale farms has increased rapidly. According to the China Animal Husbandry and Veterinary Yearbook, the proportion of large-scale farmers with more than 500 head slaughtered per year increased from 36.6% in 2011 to 55% in 2020. The industry CR10 grew from 5% in 2015 to 17% in 2022.
Large-scale farms invest a lot of money to build pig farms, and make production plans in advance, which is difficult to flexibly adjust production capacity and slaughter rhythm like retail investors. The increase in the proportion of large-scale farmers indirectly leads to a decrease in the flexibility of the overall capacity adjustment of the industry, thereby affecting the current industry capacity reduction.
Fourth, the breakthrough path: external shocks and capital breaks will accelerate the de-industrialization of production capacity
(1) Exogenous impact events and industry capital status are the key factors to break the situation
At present, the industry has fallen into a stalemate of continuous losses but slow de-capacity, and farmers are still looking forward to the subsequent rebound of pig prices, while the proportion of scale farms has increased, and the flexibility of capacity adjustment has decreased, making it difficult to actively accelerate the de-industrialization of production capacity.
Therefore, the way for the industry to reverse the current dilemma lies in the passive de-industrialization of farmer production capacity, which leads to two key variables of passive de-capacity: (1) exogenous impact events such as animal diseases and industrial policies (2) the status of the industry's capital chain.
(2) Under the background of normalization of epidemic prevention, it is still necessary to pay attention to external factors such as swine diseases
Among them, new external shock factors are a relatively direct way to break the situation, animal diseases, industrial policies and other external shock events are important exogenous variables affecting the cycle, and historical cycle reversal is mostly related to external factors such as epidemics.
Taking the 19/20 cycle as an example, the pig price in the first half of 18 was still in the loss range, with the outbreak of African swine fever, the industry's production capacity accelerated significantly, and the pig price rose rapidly to a historical high, and the pig price in 20 years was almost running above 30 yuan / kg.
At present, the prevention and control of non-plague and other swine diseases in the pig industry is becoming more and more mature, and since the introduction of African swine fever into China in 2018, the overall biosecurity level of pig farms has been significantly improved. Large-scale breeding enterprises generally establish a relatively complete biosecurity system, which can not only reduce the risk of non-plague in pig farms in a long-term stable and efficient manner, but also play a good role in the prevention and control of other animal diseases.
Under the background of normalization of epidemic prevention, farmers have gradually matured their means and experience in non-epidemic prevention and control, but due to the continuous mutation of the current epidemic non-pestilence virus, the spread of the virus is more hidden, and it is still necessary to pay attention to the impact of major epidemic diseases on the production capacity of the industry.
(3) Once the industry capital chain collapses, the production capacity will be rapidly degraded
The rupture of the capital chain of farmers is another way to break the current dilemma, the capital chain of farmers affects normal production and operation, and its aquaculture production capacity will be rapidly degenerated, while the continuous emergence of capital conditions in the industry will also aggravate the pessimism of other farmers, thereby accelerating the de-production capacity of the industry.
Taking the 2011-16 cycle as an example, the industry fell into relatively deep losses in the first half of 2014 and the first quarter of 2015, with the largest loss of self-reproduction and self-support groups exceeding 300 yuan per head. From the second half of '13 to the first quarter of '15, the industry lost more than 14 months of accumulation, and as some higher-cost farmers began to have a capital situation, the decline rate of sow inventory began to accelerate in the second half of '14, with a month-on-month decline of up to more than 2%.
The pig farming industry itself is a typical asset-heavy investment industry, and in the 19/20 year cycle, breeding enterprises generally adopt a more aggressive expansion strategy and invest a lot of capital expenditure. Since the downturn of the cycle in the second half of 21 years, pig breeding has accumulated losses for more than 15 months, and the profit of self-breeding groups and purchased piglet groups has been profitable 10 yuan / head and a loss of 90 yuan / head respectively, and the pressure of the industry capital chain has been accumulating.
Once the subsequent pig price is less than expected, the loss to the farmer begins to collapse the capital chain, the industry enters the most painful stage, and the production capacity will accelerate significantly.
Under the background of scale and informatization, the change of the structure of farmers and the improvement of expected capacity have led to the alienation of the current cycle, and the industry has fallen into the dilemma of continuous losses, but the production capacity is not smooth. The possible path to reversing the situation lies in external shocks or financial ruptures. On the one hand, it is still necessary to pay attention to external factors such as swine diseases affecting production capacity, and the capital chain situation has become the key to breaking the deadlock.
Recently, the pressure on the industry's capital chain has continued to accumulate, piglet prices have declined significantly, production capacity is expected to accelerate, and leading enterprises are expected to achieve excess returns by virtue of capital and efficiency advantages.
Risk Warning
1. Pig price fluctuation risk: pig prices fall more than expected and last for a long time, resulting in industry profits not meeting expectations.
2. Risk of fluctuation of raw material prices: The price of feed raw materials rises, and meat and poultry farming faces upward cost risks, compressing the overall profitability of the industry.
3. Epidemic risk: The occurrence of animal diseases such as non-plague has caused damage to aquaculture production, and industry companies are facing the risk of declining operating efficiency.
4. Food safety: There are many agricultural production links, and if supervision is not in place, food safety incidents are prone to occur, which will have a greater impact on the industry and the company.
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