Plans by Genus to exploit China's huge pork sector
have taken a second knock with the ditching of a joint venture with Yunnan Shennong Agricultural Group, despite some signs of recovery in
hog market conditions.
Genus, the UK-based animal genetics group,
said that because of "current adverse market conditions for pork production in
China", it had agreed with Yunnan Shennong Agricultural to exit a tie-up signed
in February last year to build and operate a 1,000-sow operation.
The cancellation represents a further setback
for plans to expand in China highlighted after a strategic review two years ago
by Kiram Bitar in one of his first moves as Genus chief executive.
Genus revealed two weeks ago - as it blamed
the setback to China's hog industry from a "sudden sharp drop in pork slaughter
prices" for a decline in group profits - that it was delaying completion of a
tie-up announced last year with another, unnamed, large pig producer.
However, it retains the working 4,250-sow
Besun farm joint venture in Shaanxi province in north central China.
Tuesday's move is believed to have been
driven by Yunnan Shennong Agricultural shelving expansion plans, amid a steep
downturn in China's notoriously cyclical hog production fortunes.
"Shennong had previously sought to slaughter
circa 1m pigs per annum from 50,000 sows, but given the tremendously
challenging environment in China has decided to stop at 6,000 sows, all
supplied by Genus," said Damien McNeela at broker Panmure Gordon.
Chinese hog prices hit a three-year low last
month, while pork prices were near
their weakest level in seven years, diminishing producers' margins.
Indeed, margins, as measured by the spot
price of pork compared with that of corn, a major feed ingredient, were at
their lowest in nearly four years, according to research by John Clemmow at
Local reports estimated that farmers were
losing about 500 yuan ($80) on every pig sold.
However, the market has shown signs of
recovery since China's National Development and Reform Commission early this
month unveiled a round of pork buying for reserves, in an effort to revive the
Although low prices of pork, of which China
is by far the biggest consumer, are popular with consumers, they carry a risk
of leading to squeezed supplies and a sharp rally in values, if they lead to
steep production cutbacks.
Hog prices rose 18% the days after the NDRC
announcement, and added 7.5% last week, according to Australia & New
Zealand Bank, which has compared the impact of the commission's move with that
from a similar stockpiling announcement in May last year.
"The government announced a round of pork
buying in May 2013 only to see prices rise 20% in a week before then
stabilising for several months," the bank said.
In the City, VSA Capital restated a "negative"
rating on Genus shares, citing the impact of porcine epidemic diahorrea
virus (PEDv) on the genetics group's North American trade, besides the "slower
Chinese expansion than initially expected".
"With significantly weaker Chinese pork
pricing so far this year pushing many pork producers into losses, it is not
unsurprising that many producers are scaling back expansion plans at this point,"
VSA analyst Edward Hugo said.
At Panmure Gordon, Mr McNeela restated a "sell"
rating on Genus stock with a 910p target price.
"Our concern remains that the valuation looks
too high given the recent weak earnings performance and the continuing
uncertainty in its outlook," he said, although adding that today's announcement
was "unlikely to have any material impact" on forecasts for 2015 profits.
The joint venture's demise could, however, "herald
a shift in Genus' approach to the Chinese market as it seeks alternative, and
less capital intensive, ways of monetising its genetics".
Genus shares stood 0.8% lower at 1055p in
morning deals in London.