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Chinese feed groups expand into pork output, despite waning margins

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Feed companies are scrambling to get into hog rearing in China, adding the equivalent of Canadian output to capacity, even as some pork producers are expanding into processing to escape shrinking margins.

Total investment in animal farming by Chinese agriculture-related, stock listed companies soared 10 times to 49bn yuan, equivalent to $7.2bn, last year, the US Department of Agriculture bureau in Beijing said.

Of this, $6.1bn was invested in hog farming, of which China is already by far the world's biggest operator, boasting more than half the world's swine herd.

However, this growth was driven by feed companies expanding into hogs, rather than by traditional pork production group.

The equivalent of an estimated 27m head in annual pig slaughter added is not far short of the total 28.7m head slaughtered last year in Canada, the world's sixth-ranked pork producing country after China, the EU, the US, Russia and Brazil.

Feed market share

The expansion into hog rearing is being driven by a quest to secure share of the competitive animal feed sector, with China's soy crushing capacity, for instance, well ahead of the level needed to satisfy the country's huge demand.

"Industry analysts believe that by engaging in swine farming, the feed companies may enjoy an advantage in expanding their feed market share," the USDA bureau said.

Chinese feed output rose by 6.6% above 115m tonnes in the first five months of this year.

The bureau also noted that the investment in new hog production capacity, "showed a significant move to the north" of China, with Inner Mongolia alone receiving $1.86bn of the overall investment.

Heilongjiang, also a major corn and soybean producing province, was third in the list of investment targets.

Thinner margins

However, the shift by feed groups into pork producers comes as many traditional hog groups are complaining of margins weakened by an upturn in output, encouraged by higher prices last year, besides from resilient imports.

China's top pig farmer Guangdong Wen's Foodstuff Group, in May revealed it was pushing into processing meat, in an effort to escape the margin pressure on pork output, and following a similar move by rival WH Group, the company which bought US giant Smithfield Foods.

The USDA bureau said that Chinese swine production profits had fallen from "high" levels to about 300 yuan ($45) a head last month.

"Industry insiders believe swine inventory will continue on a moderate recovery and swine profits are expected to stabilise or lower slightly from the current level during the second half of 2017."

Pork import implications

Rabobank last week said that China's hog output, which it forecast rising by 2% over 2017, "was faster than expected in the first half of the year, as many producers shared a positive view of the market and made rapid herd replenishments".

The dynamic, and a fall in Chinese pork prices to 30% below last year's record levels, was reflected in "flat" imports in the January-to-May period, "which contrasts with the significant growth seen in the first half of 2016".

By Mike Verdin

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