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China hog revival signs fail to save Genus tie-up

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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.

'Tremendously challenging environment'

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 mont


, 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 Barclays.

Local reports estimated that farmers were losing about 500 yuan ($80) on every pig sold.

Market recovery?

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 industry.

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.

Market reaction

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.


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