China, the world's largest pork market, is seeking to reform
the country's pork industry in a drive to stabilise prices, improve product
quality and adjust to changing consumption trends.
At the same time, private companies are also looking to meet
higher standards and expectations of more sophisticated consumers.
Perhaps the most important event in recent months has been
the introduction of a pork price index at the Dalian Commodity Exchange, the
first in China.
The China's agriculture ministry and the Dalian Commodity
Exchange signed the "Joint Action Plan for Bulk Agricultural Commodity
Market Information" to jointly issue a "lean type pork price
The pork price index, introduced on March 14, is the
country's first pork price index that is published on a government public
service website and oriented toward a commercial application.
The index is compiled by using data from 89 large sized
slaughtering companies in 16 main production and sales provinces in China.
The Dalian exchange said that "these slaughtering
enterprises are representative of the country's industry as their production
accounts for 32% of the total slaughter volume of the designated slaughtering
enterprises above a certain size across the country".
This development is viewed as a stabilising factor in a
country with often volatile pork prices.
That's because the Chinese market has so far been dominated
by small-scale farms which are highly sensitive to price swings. This has
historically made it difficult to create a price index.
In the past, when pork supply was high, farmers reacted to a
drop in prices by slaughtering pigs for meat rather than breeding more piglets.
A few months down the line this would result in a shortage
of pork, sending prices high again.
Futures contract looms?
The introduction of the pork price index also lays the
groundwork for futures and options contracts, which the Dalian has already
Introducing a futures contract could result in more price
stability because buyers and sellers can hedge against risk by agreeing on a
price in advance, which could give pork producers peace of mind.
A futures contract is an agreement to buy a commodity or
another asset at a specific price but have it delivered and paid for at a later
Crackdown on urban
Another major development has been a crackdown on urban pig
rearing and a drive towards more centralized, large-scale farming.
China's latest five-year plan for agriculture set a goal of
moving swine production away from waterways and densely populated areas, and
into the countryside.
This resulted in widespread bans on pig production in urban
areas, being implemented by local authorities from 2017.
The main impact from this will be lower pig production in
the short term, which could result in higher domestic prices and more imports to
compensate for the shortfall.
And as China consolidates and modernises its swine industry,
the total volume and market share of pork production from large companies,
especially fully-integrated operations, will further increase.
Pork has a huge influence on the Chinese economy, which is
most pronounced in the consumer price index and is also reflected in inflation
According to some estimates, the country is home to half the
world's pig population and it also imports vast quantities of the meat.
This dynamic is seen as a primary reason behind the purchase
in 2013 by China's WH Group of US-based pork producer Smithfield Foods.
The rationale behind purchasing Smithfield Foods was to take
advantage of lower hog prices in the US and higher pork prices in China.
Given China's huge appetite for pork, perhaps it is not
surprising that operating profits at Smithfield's fresh pork business increased
by 141% to $545m in 2016.
'Growing faster than
In a Bloomberg interview in March, Kenneth Sullivan, executive
director of WH Group and chief executive of Smithfield Foods, said that the
company doesn't see pork consumption moderating in China - not in the long term
However, "in the short term the macroeconomic environment in
China will cause a bit of a slowdown there.
"It's already put a little bit of a dent there in protein
consumption in the country.
"But if you look at it over the very long term, protein
consumption in China is growing faster than any place in the world.
"The urbanisation, the increasing incomes all these have a
very positive correlation to pork consumption and to protein consumption in
general," Mr Sullivan said.
Rabobank has underpinned this cautious forecast, with the
bank downbeat on Chinese pork output prospects for the first half of 2017,
given that "the sow inventory before August 2016 was, on average, 5% lower than
"Production will likely start to recover in the second half
of 2017, as lower feed grain prices encourage farmers to build up herds and
newly established capacity comes online."
Mr Sullivan added that "we could see a significant increase
in exports from the US to China – the big idea is that China is the biggest
pork market in the world – half the world's pork is consumed in China, so it's
a huge market".
Mr Sullivan also pointed out in the interview that
consumption trends are changing in China.
Consumers are becoming more sophisticated and demand for Western
style meats is growing.
He added: "The more income you have you change the way you
"As their incomes rise, the more Western style produce they
will consume, so American style bacon, ham, sausage, these sorts of things.
"For us, the WH Group, it's a huge opportunity".
Blockchain earns its
Other US firms are also aware of this opportunity and are
looking to ride this wave of change.
One of them is Walmart's Chinese arm, which has teamed up
with IBM to roll out a blockchain system to track pork movements from farm to
The rationale behind this is to show customers that Walmart
pork products are of high quality and are traceable, which is hoped will give
Walmart customers peace of mind.