Minmetals Futures Chongqing Business Department
Author: Wang Jun
Key points of the report:
Under the background of supply recovery and weak demand, since the beginning of the year, pig prices have continued to be below the general cost line, and it is difficult to return; However, the underlying forces below are also more resolute, and the price has not reached a new low year-on-year, but has shown a narrow and resistant downward trend, trading time for space. The futures plate inherits the logic of squeezing water since last year, and under the background of the overall pig price being weak and the contango structure between the futures and the futures showing a low and then high, it is not the spot waiting for the realization of the price increase expectation, but the return of the plate downward to the spot one by one.
The current contradiction of the industry is that, on the one hand, capital resilience has increased, production capacity de-transformation has not yet been substantially carried out, and the judgment of cycle reversal is still early; On the other hand, the longest loss period in history is about to come out, and the cash flow of some entities is shaky, and it is imperative to cut the exit plan. Whether the de-production capacity will eventually occur depends on many variables and is still difficult to determine.
Standing in the middle of the year, comprehensively considering the supply, demand, price and profit in the second half of the year, the fundamentals rarely resonate, the supply and demand lack of the main line contradiction, the overall judgment of the price is still a wide range of shocks, in which the sentiment will play a key catalytic role, the expected swing will intensify the short-term contradiction and produce a new expectation difference. From June to August, under the catalyst of the weak break period, spot may have room for rebound, and the core fluctuation range is expected [14,17]; From September to October, supply returned to excess, demand has not yet exerted, the trend is expected to be weak, fluctuation range [17, 15]; From November to January of the following year, the price may rise first and then fall, and the core range is expected to fall at [16,20].
The market is expected to remain dominated by spot-led driven transactions, with stable capacity changes and difficult valuation transactions; On the other hand, considering that there is a certain premium in the far month, in the long run, under the background of the lack of significant reduction of production capacity, there is still an advantage in squeezing water at high altitude, and industrial hedging is recommended to lock in at high prices. In terms of trading, it is recommended that the rhythm refer to or slightly advance than the spot, the early low of June to August is mainly 07, 09, the reference range is [15000, 17500], after August, wait for the high point to be short-based, and then take back the long order after the low point is generated, 11, 01 and other contract fluctuation range reference [19500, 15500].
The risk of the above judgment comes from: in January and June, the emotional selling overshadowed the supply reduction, and the price collapsed early. Second, the supply reduction from June to August exceeded expectations, and the second cultivation pressure fence entered the market, and the market sharply repaired the expected difference.
GO
01
Market review in the first half of 2023
In the first half of the year, pig prices continued a weak decline since late October last year. Under the background of supply recovery and weak demand, since the beginning of the year, pig prices have continued to be below the general cost line, and it is difficult to return; However, the underlying forces below are also more resolute, and the price has not reached a new low year-on-year, but has shown a narrow and resistant downward trend, trading time for space. The fluctuation range of mainstream prices is 14-16 yuan / kg, of which the support around 14 yuan / kg is strong, the price from January to March fluctuates in the range of 14-16 yuan / kg, and the price has been further limited to a narrow range of 14-15 yuan / kg since late March.
The first half of the year is the traditional pork consumption off-season, although the epidemic liberalization and frozen products into the warehouse and other favorable demand side, but the basic supply is also in a rapid recovery period, coupled with the previous supply backlog caused by large weight, more large pigs, superimposed speculative pen and ergory rotation out of the pen pressure, pig prices have never been able to get rid of the decline, oversupply nightmare lingering. The underlying strength comes from the support of speculative behaviors such as policy storage and storage, frozen product warehousing and secondary education bottom hunting.
Year-to-date, the market has inherited the logic of squeezing water since last year, and under the background of the overall weakness of pig prices and the contango structure between the futures and the high, it is not the spot waiting for the realization of the price increase expectation, but the return of the plate downward to the spot one by one. Of course, spot has had a considerable rebound in early February and late April respectively due to policy storage, and its impact is spot, near month and far month in descending order, but each final fall of spot makes the disk repair the basis at a faster downward rate, especially before delivery. In addition, due to the change in the premium of part of the delivery site, the difference between 2305 and subsequent contracts is that the delivery discount no longer shows a large delivery discount before the delivery month, which partially alleviates the play of the bears' power.
In the first half of the year, the market followed the path dependence of increasing positions and falling since the listing of pigs, reducing positions and rebounding, the total position range is roughly in the range of 7-100,000 lots, and the decline before February, March to April, and after May is accompanied by a large increase in positions, while the rebound in February and late April has a large reduction in positions. The current total position once again exceeds 100,000 lots, which to some extent may indicate that the space below the market is relatively limited.
02
Cyclical characteristics and market analysis
In the post-non-plague era, after experiencing the big decline and rise of production capacity, experiencing the deep involvement of capital in the aquaculture industry and the impact of the epidemic on consumption, the cyclical law has become no longer obvious, and the traditional cycle analysis is no longer applicable. However, the internal mechanism still has reference significance, 06 has experienced 4 complete pig cycles, is currently in the second year of the fifth round, belongs to the traditional rising year, considering that the industry has not been able to accumulate enough cash flow in this cycle, the future pig price may still have the potential to rebound.
According to the principle of reflexivity, the pig price is a mirror image of its price 40 weeks ago, which has been fully reflected in the trend of pig prices in previous years. From the mirror model, the price after June and July this summer is the mirror image of the peak and decline from October to November last year, which lasts until November and December, and the probability of pig prices rising at this stage is large.
The windfall profits of the non-plague era attracted a lot of capital to intervene in the pig industry, and it took less than a year to change production capacity from extreme shortage to complete surplus, and the continuous losses of the entire industry in 21-22 are still vividly remembered. In this downward cycle, there are two periods of continuous losses, which are 23 weeks and 27 weeks respectively, and the current round of losses has lasted for 23 weeks since late December last year, and the length and magnitude are close to the previous two rounds. However, considering that even if pig prices start to rebound now, it will still take weeks to turn a profit, so it is judged that the final duration of the current round of losses may be longer than the previous two rounds, and the degree of damage to the industry's balance sheet is greater than the previous two.
In the first quarter, listed pig enterprises have reported losses, industry confidence has been hit, insufficient expectations for the future, starting from the reduction of piglet extraction, the ultimate goal is to reduce the annual plan at the beginning of the year, such as Dabeinong, Aonong, Tianbang, etc. The reduction rate is about 20%, or to a certain extent, the pressure of the second half of the year is reduced.
Despite persistent losses, the current level of capacity reduction is still not ideal. According to official data, January-April 2023 is the reduction stage of production capacity, and the number of breeding sows as of the end of April was 42.84 million, equivalent to 104.5% of the normal holdings, only down 2.4% from December last year, less than the 4.7% cumulative increase in production capacity from May to December last year, and still 2.6% higher than last year; Yongyi data shows that the total number of sows dematerialized has been 5.2% since November last year, which is still 3.1% higher than the same period last year, and the production capacity has stopped falling and stabilized again since April, with a slight increase of 0.04%.
From January to May, fat pigs continued to lose money, but piglets still maintained a single profit of 100-200 yuan, and the piglets were profitable, resulting in a weak motivation for the industry to take the initiative to remove sows; From the perspective of the price of eliminated sows, the proportion of fat pig prices is still 60% or even more than 70%, indicating that there is no phenomenon of excessive culling of sows.
From the perspective of slaughter, the absolute level of slaughter in the first half of the year was higher, and it was also significantly larger than last year, which was also excessive, plus the average weight was higher than last year, which means that the total supply of pork behind it was significantly greater than last year. As of early June, the storage capacity of frozen products was around 24.2%, 6.5% higher than last year. Nevertheless, considering that this year's overall price is stronger than last year, and the degree of loss is better than last year, it is judged that the basic consumption is better than last year, which is greatly affected by the logic of epidemic liberalization and consumption recovery.
The amount of slaughter after May Day has declined, and with the continued decline in weight, it is judged that the supply began to reduce the scene, but the price is still weak, indicating that from a month-on-month perspective, the overall consumption has not been a big surprise since May Day.
The average weight of the slaughter at the beginning of the year was nearly 5kg higher than the same period last year, and the fat pigs were seriously labeled pigs, indicating that the overall production capacity was obviously backlogged, and there were more large pigs. With the decline in prices and the continuation of breeding losses, the weight has continued to decline month-on-month, and the average weight of the current transaction has reached the same level as the same period last year, down by about 3kg from the beginning of the month, representing that the overall upstream is dominated by the trend, and the production capacity has not continued to accumulate in the future, and the pressure on large pigs has also been greatly eased. On the other hand, the average weight after slaughter is still about 2kg higher than the same period last year, indicating that the basic pressure still exists.
As shown in Figure 14, generally speaking, spring is more suitable for fat pigs to gain weight, seasonally weight tends to rise, but this year's weight anti-seasonal decline, to a certain extent, indicating that this year's production capacity is different from 21 years, not a serious excess scene.
Finally, in years when the underlying supply is highly variable, weight changes can be misleading. For example, the 20-year stock base is small, and the weight continues to accumulate from February to April, but the price rebounds strongly after May, because the pig base is small, and a little drop in weight is already a positive. This year, we need to beware of the possibility that there are more standard pigs and the growth rate is relatively fast, but the weight does not increase, and the capacity is still overcapacity.
03
Industry outlook
According to the production cycle, push the sow inventory back 10-11 months, you will get the theoretical output of fat pigs, according to the trend change of the previous sow inventory, it is deduced that the supply of fat pigs began to rise month-on-month from March this year, accelerated from April to August, and the supply turned down after September and October, and the overall production capacity this year is a recovery year, and the supply began to gradually decrease in the fourth quarter. Compared with the official data, the overall production capacity will increase first and then decrease.
However, from the sow inventory to deduce that the fat pig out of the pen has the problem of too long chain, there are production efficiency factors in the middle not considered, such as ternary proportion, breeding rate, survival rate, epidemic disease, etc. have a greater impact on production capacity, reflecting emotions of pen pressing, secondary breeding and other behaviors are also ignored, from last year's actual results, the accuracy is not good, so it is only a factor for reference.
The chain of piglets pushed back is shorter and has advantages over sow data at the practical level. Piglet data show that the greatest pressure this year was in April-May, and the pressure was reduced after May, and the supply showed a downward trend in June-July, but the intensity was relatively flat and the magnitude was average, and the supply gradually recovered after August, and the production capacity returned to a high position in October.
Piglet feed backwards to reach similar conclusions, of which May-July fat pig reduction or relatively obvious, January piglet feed reduction of 9.5% corresponding to June will make the supply significantly reduced, combined with the May to August breeding weight gain effect is not good, weight generally shows a seasonal decline trend, judging that the supply side in June to August there is room for reduction, price or storage support.
Finally, there is also an impact on the piglet end that cannot reflect the emotions of each period, and market behaviors such as secondary breeding, weight gain and weight loss may change the rhythm, accelerating, advancing or smoothing out.
The loss of piglets at the beginning of the year can be largely attributed to the increase in piglet survival rate and mortality caused by epidemics, and the early market is more concerned about the development of epidemics including non-plague and piglet diarrhea, blue ear and other types this spring, or has a potential boost to mid-year prices, which is especially sensitive in years of breeding losses. From the data we monitored, the weaning and birth survival rate of piglets at the beginning of the year did decrease, and the proportion of piglets out of slaughter also increased significantly, but the range was still within the seasonal controllable range, and there was no significant difference compared with previous years. Therefore, it is judged that there may be support in the middle of the year, but the magnitude should be limited.
After May Day, there are two possibilities for the decline in slaughter and weight. First, the supply side begins to reduce the amount, considering that if it is a slaughter reduction caused by warehousing or poor consumption, the weight performance should be stable or slightly increased; The other is the increase in secondary breeding, which leads to an increase in the slaughter of small-weight pigs, thereby reducing the overall average weight of the slaughter but not flowing into the slaughtering end, if this is the case, the price should be strong, and the weight after slaughter is stable or increased. At present, this scenario is more likely to correspond to a slight decrease in supply, but demand is not good (including a decrease in storage), so the price is weak and bottomed.
The weakening of the standard fertilizer price spread is seasonal, but it is higher than last year and the year before, which also indicates that the current pressure on big pigs has been fully released.
Regarding medium-term supply and demand, the slaughter volume in the first half of the year increased by 15% year-on-year, which basically verified the recovery of piglets and sows, and the latter two still have room for continued release in the second half of the year; Short-term slaughter volumes, although slightly lower month-on-month, remained in the seasonal range and did not constitute a significant positive. From the perspective of weight decline and increased production capacity, this year is a year when there are many pigs and few pigs, and if the confidence of the industry recovers in the middle of the year, there is still room for pressure to press back, otherwise it will still be a scene of continuous surplus in the medium term.
04
Price and strategy outlook
Supply backlog superimposed on capacity recovery, the length of continuous losses in the industry in the first half of the year exceeded expectations, the early market was too optimistic about the recovery of consumption, and the premature intervention of frozen products and secondary education and other forces, although it can support the bottom, but objectively also play a role in lengthening the cycle. The current contradiction of the industry is that, on the one hand, capital resilience has increased, production capacity de-transformation has not yet been substantially carried out, and the judgment of cycle reversal is still early; On the other hand, the longest loss period in history is about to come out, and the cash flow of some entities is shaky, and it is imperative to cut the exit plan. The de-production capacity will eventually occur, and whether it will be a storm or a gradual transition is still variable.
Standing in the middle of the year, comprehensively considering the supply, demand, price and profit in the second half of the year, the fundamentals rarely resonate, the supply and demand lack of the main line contradiction, the overall judgment of the price is still a wide range of shocks, in which the sentiment will play a key catalytic role, the expected swing will intensify the short-term contradiction and produce a new expectation difference. From June to August, the industry is facing a game between a potential weak break and weak demand in the context of high supply, rationally judging that the price has a weak but relatively certain rebound space, but the early pessimistic mood or the later radical pressing and secondary education strategy There is a possibility that the market is over-falling or over-rising, and the spot core range is judged to be [14,17]. From September to October, the weak break period ended, the production capacity returned to excess, demand still did not keep up, the price may have a pullback, the industry does not rule out a return to the state of loss, the spot core fluctuation range is expected to be in [17, 15]. From November to January of the following year at the end of the year, based on the fact of active or passive reduction of production capacity at the beginning of the year, the market may once again produce a consensus expectation of price increases at the end of the year, but the intervention of speculative forces leads to the possibility of advancing prices, and the supply is concentrated before the holiday, so that the real price increase before the holiday is less than expected, and the price is expected to rise first and then fall, and the core range is [16, 20].
The market is expected to remain dominated by spot-led driven transactions, with stable capacity changes and difficult valuation transactions; On the other hand, considering that there is a certain premium in the far month, in the long run, under the background of the lack of significant reduction of production capacity, there is still an advantage in squeezing water at high altitude, and industrial hedging is recommended to lock in at high prices. In terms of trading, it is recommended that the rhythm refer to or slightly advance than the spot, the early low of June to August is mainly 07, 09, the reference range is [15000, 17500], after August, wait for the high point to be short-based, and then take back the long order after the low point is generated, 11, 01 and other contract fluctuation range reference [19500, 15500].
Risks: Emotional selling overshadowed supply reduction in June, and prices collapsed early; From June to August, the supply reduction exceeded expectations, the second breeding pressure fence entered, and the plate sharply repaired the expected difference.
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