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Genus flags China support to world pork industry

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China, whose slowing economic growth is a worry in many commodity markets, may "provide support" for the world pork industry, as it seeks for supplies following a sharp herd contraction, Genus said.

Chinese pork producers have cut their sow herd by 19%, or nearly 9.5m animals, in the past 18 months in response to a squeeze on margins – a reduction which Rabobank has termed "one of the largest culls in history", equivalent to the loss of Canadian, Mexican and US herds combined.

"A slowdown in demand for higher priced protein foods combined with oversupply continued to depress pork prices for much of the year, impacting pork producer profitability," Genus said.

However, the knock-on effect of the herd reduction is now feeding through into tightened pork supplies and higher prices, which could support industries both domestically and abroad.

Cycle turns

Genus said that "the reductions in supply led to a recovery in the pork price of approximately 15% towards the end of" the group's financial year, which finished in June.

This had helped Chinese producers' margins "to return to positive in June, based on Genus's analysis".

Data from analysis group ChinaJCI Consulting shows the important hog-to-corn price ratio in China recovering from a spring low of some 4.9, well below breakeven, to hit 7.62 by late August, indicating producer margins comfortably in the black, and the highest since at least 2011.

While this may prompt a cycle of herd rebuilding in China, for now the dynamics could boost conditions for foreign pork producers too.

"Though imports into China are a small proportion of the market, approximately 2-4%, the recent increase in price and low domestic supply may provide some support to the global market as a whole in the next financial year," the company said.

Surging imports

While Genus stopped short of making any forecast for Chinese pork imports, the comments follow a forecast last month from Rabobank that buy-ins will surge 45% in calendar 2015 to 1.9m tonnes, and remain high next year.

"China's pork prices have spiked, bringing local producer profitability back to a positive level not seen for some time," Rabobank said.

"In addition, the higher pork prices have made pork imports from the European Union, US and Canada competitive again.

Chinese pork imports in 2016 will reach a "similar level" to those this year, "as the low sow inventory, which we expect to have bottomed out during the July-to-September quarter of 2015, will likely impact the piglet supply through mid-2016, supporting elevated pork prices", the bank said.

US herd rebuild

Genus's comments came as the animal genetics group reported a 19% rise to £46.6m in underlying pre-tax profits for the year to the end of June, on revenues up 7% at £398.5m.

The group achieved an operating loss, albeit a reduced one, in its Chinese pig genetics division, thanks to the poor market conditions, which prompted it to exit two farms over the year.

"Market prices remained low during most of the year, depressing demand for breeding stock, and volumes and breeding margin reduced," the group said.

However, operating profits at porcine operations outside Asia had an "outstanding year", said Karim Bitar, the Genus chief executive,

Helped by the rebuilding of the US herd as the outbreak of porcine epidemic diahorrea (PEDv) faded, beside by takeovers, the division raised operating profits by an underlying 18% to £61.9m.

'Cautiously optimistic'

Mr Bitar added that the group's growth rate might be "more moderate" in the year to June 2016, undermined by the weak margins among global dairy producers.

"On current conditions, we are cautiously optimistic about improved results in Asia," he said.

"However, we remain cautious about prospects in dairy, where market conditions are very tough for our customers, and porcine commodity prices have worsened compared with last year."

The group said that, for dairy prices, "market predictions are for a gradual recovery at best, towards the end of this calendar year and going into 2016".

Market reaction

Genus shares eased by 0.2% to 1372p in morning deals in London.

At broker VSA Capital, Edward Hugo noted that "once again, Genus Asia has been problematic.

However, the recovery in Chinese pork margins "should benefit Genus's stuttering expansion there, as China's larger, more professional producers should be able to increase herd-size and thus demand for improved genetic material".

By Mike Verdin

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