WH Group, the world’s biggest pork processor, said it was expand its poultry business in a drive for “protein diversification”, after a year in which African swine fever cut its hog processing numbers in China by 3m head.
The China-based group, which owns US pork giant Smithfield, said it was to “increase our exposure to poultry”, on grounds of “risk management and further value creation”.
The expansion of the WH Group poultry business was “an integral part of our strategy in protein diversification”, said the company, which is to open a farming and processing site for 100m chickens in Henan province.
While the company already has in China and Europe a poultry flock of 5.49m birds - comprising 4.86m broilers and 625,000 head of breeding stock - this is dwarfed by its pork operation, which as of the end of December boasted 13.34m hogs.
However, poultry has become a fast-growing market in China, as consumers look for alternatives to pork, prices of which were sent soaring by the dent from African swine fever to domestic supplies.
Chinese poultry imports soared 52% year on year to 628,000 tonnes in the first 10 months of 2019, to meet soaring demand - which is also fuelling a surge in domestic output.
This expanded by 15% last year, and will grow "even faster" in 2020, according to Rabobank, which has also proposed that "while initial recovery of the Chinese pork supply chain is underway, this will not compensate for pork production losses – there is enough space for all proteins to grow in order to fill the supply gap left by Chinese pork in 2020".
WH Group’s comments came it said that it faced “unprecedented challenges” this year from, besides the coronavirus pandemic, the likes of “sluggish” global economic growth and “risky” geopolitical relations – and also from a “continuation of African swine fever”, or ASF.
“In China, the impact of ASF is expected to endure.”
In fact, there is evidence of a rebuilding in China’s swine numbers. Separately on Tuesday, Chinese farm ministry data showed 2.8% growth month on month in China’s swine herd in February – a period often marked by declines, given slaughtering for seasonal holidays.
Factors such as growth in imports of whey, a key piglet nutrition ingredient, indicate rapid expansion too.
However, this follows a massive cut last year in Chinese pig numbers, which on US Department of Agriculture estimates fell by 22%, or some 93m head as ASF took a heavy toll – and encouraged farmers with healthy animals to hike slaughtering too to avoid the risk of losing animals to the virus.
WH Group reported that the number of hogs it processed in China last year fell by 19.0% to 13.20m head.
“As the impact of ASF manifested gradually, our volume was severely constrained by the reduction in market supplies of live hog.”
It also noted in China a “softening in demand as pork prices escalated” in response to the squeeze on hog supplies, prices of which themselves rose by 63% to 21.2 renminbi per kilogramme over 2019, reaching a record 40.0 renminbi per tonne in late October.
Nonetheless, the extent of drop in pork sales volumes was more than offset by price gains to send WH Group’s fresh pork revenues in China soaring 32% to $4.73bn.
Operating profits soared 46% to $262m in China - and by 64% to $403m group-wide - as the company exploited the raised margins on its own pig production, while noting a boost from “effective hedges” too.
While the packaged meats business achieved a more modest 1.7% gain in operating profits, to $1.57bn, with margins constrained by higher protein costs, the company reported a 23% rise to $2.03bn in operating profits for the year, on revenues up 6.6% at $24.10bn
Earnings came in at $1.38bn, a rise of 32% year on year.
China vs US
WH Group added that it expects a further decline in Chinese hog slaughter volumes this year while, by contrast, for its US operation, an “overabundant supply of meats” in the American market represented a particular “challenge”.
“We will increase our efforts in exports” from the US, “particularly to China and other Asian markets”.
The company said that Chinese hog prices were currently more than four times those in the US, a spread expected to ease to some 3.5 times in the second half of 2020.
Separately, Chinese customs data showed a 158% surge ot 560,000 tonnes in China’s pork imports in the first two months of 2020.