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Profiles of the Chinese Pig Industry
Profiles of the Chinese Pig Industry No matter whom you ask, the answer will be the same: China is the No. 1 pork producer and consumer on this planet. In the year of 2000, 527 million heads of pigs were slaughtered, and nearly 50% of all pork in the world is now produced in China (NBSC, FAO, USDA, 2002). The 1.3 billion consumers seem to prefer pork over any other meats in their meals-essentially all pork produced in the country is consumed domestically. Depending on whom you ask, you will at least have some different answers about the profiles of the Chinese pig industry. In 1999, a survey conducted by NBSC (National Bureau of Statistics of China) revealed that households in rural China raised an average of 1.48 pigs (NBSC, 2000). One person of 8 in the world is a Chinese farmer. Another frequently quoted statistic is that about 80 percent of all Chinese pigs are produced in the backyards of farmers’ homes. Recent reports prepared in 2002 by hog industry associations in Zhejiang, Shanghai, Beijing, and Guangdong provinces proposed that 40 to 50 percent of the hogs were produced on ‘scale farms’ in those provinces. However, it is difficult to precisely define a ‘scale farm’ and validate the reports without more reliable data. What are the correct numbers to describe the profiles? The reality may be simple: there has been no sound and comprehensive investigation/survey accomplished so far in order to accurately profile the industry. Increasing market openness inferred by China’s accession to the World Trade Organization, continued income growth, and the shift of food consumption patterns towards more meat have attracted more and more attentions from the rest of world on Chinese pork industry. This report attempts to depict the pig industry in China by exploring the production costs and major constraints of several swine producers. Key factors and issues will accordingly be stressed to illustrate what differentiates the Chinese pig industry from other countries’ and what direction the industry is heading infor the future.
Case 1: Ms. Yan - Struggling Backyard Producers Ms. Yan is 64 years old and has been raising two pigs for the last 40 years except for several extreme years in early 1960s when many people died of famine. She and her husband re-built their house in rural Shandong Provinces at least six times in the last 40 years. In those very difficult years amid the Cultural Revolution, 3 or 4 pigs a year could add a significant part of family revenue. Food grain (mainly wheat) was never enough for four young children in the early years. Selling a pig two or three times a year allowed for the purchases of other foods in return.
Table 1. Operation Description of Ms. Yan’s 2-pig Farm.
Items Note
1. Feeder Pigs- bought from local bazaars at about 15 to 23 Kg and about $0.85/Kg 2- or 3-way crossbred. Pay can be deferred as short-term debt.
2. Feed- only about 10% of the feed is grain, protein meals, and premixes; others are food residues with no cost. Only feed little grain at early and late stage.
3. Days to market- about 200 days from 20 Kg to 65 Kg.
4. Market pigs- sold to dealers or on local bazaars. Live weight price varies from $0.65 to $0.80/Kg in 2002.
5. Manure- stored in a open pit for field application Considered to have value
6. Labor & Vets- time used for buying and selling pigs and cleaning; vets and drugs cost about $10 per pig. No opportunity cost for labor included
TTable 2. Consolidated Balance Sheet of Ms. Yan’s 2-pig Operation,
June 30, 2002
Items Amount, USD Items Amount, USD
Assets Liability
Current
Cash for feed and vets 42 Short term debt for feeder pigs 19
4% premix and other feed in store 9 Taxes payable 4
Fixed
Pig shed, trough, and tools 133
Pigs 77
Total equity 238
Table 3. Estimated Consolidated Income Statement of Ms. Yan’ 2-pig Operation, December 31,2002
Items Amount, USD Note
Revenues
Pigs sold 141.5 3 pigs sold a year
Manure collected for fertilizer use 29 Opportunity cost
Expenses
Buy feeder pigs 21.5
Grain and protein meals 13.8 8% of feed
Premixes 2.8 5 Kg total
Labor 65 Normally not included
Vets and drugs 7.3
Others 6.5
Depreciation 2.7
Net income before taxes 50.9
Net income 48.9 3-5% taxes and fees
Net income per pig 16.3 Advantages to be a backyard producer
· Enter or withdraw business to/from pig industry at essentially no cost.
· Production flow is totally adjustable depending on market price.
· Two or three pigs sold per year used to account for 30 to 40 percent cash income for her family but now may be down to only 10 percent.
Disadvantages and constraints
· No leverage power on inputs and products prices.
· Diseases can cause serious problems and losses.
· More difficult to find market and sell pigs due to higher cost of transportation, thus usually receive lower prices.
· Always being a lowest price receiver no matter how much you improved genetics.
· Young generation consider odor a problem and neighbor’s complaints of odor. Decreased interests in pig production by younger generation. Actually, backyard pig production is disappearing in areas around big cities.
· Opportunity cost of labor has been noted and begins to increase.
Emerging Issues Industrialization, continuous reform, and opening to the outside world are bringing about many changes in the Chinese pig industry. Observers and researchers interested in the Chinese pig industry are studying the issues currently emerging in the country in order to sketch the outlook for Chinese industry. Concerned about potential problems caused by reductions in rural incomes, the Chinese government, with a long history of planned economy, will probably continue to provide various supports to the households in agricultural areas. Pig production is one of the sectors chosen by the government to help raise farm incomes. The trend towards household specialization and expanding farm sizes will continue in the hope of increasing production efficiency. Although the pace towards privatizing state-owned swine farms is not fast enough to meet the industry expectation, the resolve of the government to drop the long—-suffered burden of poor-managed farms is evident. In Guangdong, local governments have already liquidated many swine farms, facilitating purchase by farm managers and technicians at very reasonable prices. One popular model is to let the managers own up to 40% of net assets/equity and other workers can buy the rest. After the reform the state may or may not retain shares in the business. Managers normally have to pay cash or amortize the initial cost of the transaction. Managers are. They are even allowed to buy out the farm using the future earnings in some areas. In addition, the value of a pig farm will be assessed well below the real value in order to make it affordable for managers. Newly created private swine farms can be very competitive due to the low fixed costs and total assets, at least in a short term. In addition to an immature market economy, poor infrastructure and logistics to handle live animal and chilled pork logistics will remain a major constraint for a long time. Other aspects like production efficiency are also major constraints for many Chinese swine farmers to overcome. This is not limited to technical skills. Perhaps more important is the lack of basic management skills needed to add economic value to a swine operation. Chinese consumers looking for quality and flavor seem willing to pay higher prices for pork. Pioneering companies have reported success in value-added products when they try to emphasize pork quality by cross breeding lean pigs with local Chinese breeds. Several food producers have already opened specialized stores or supermarket counters for ‘local-flavor pork’. The broiler industry has already experienced a similar change in several provinces in southern China where the fast-growing broilers have now mostly disappeared from the markets due to unfavorable eating quality.
Food safety has recently caused a large amountlot of public concerns in China due to a spate of cases where pork was contaminatedfood-related toxicities. In the past 3 years, several human fatalities have resulted from pig farms deliberately adding clenbuterol to increase pig lean content. Complaints and anger from the public have forced the government to impose tighter control and establish strict new laws for quarantine and inspections. The change could potentially deter the new entries of small pig producers and reduce the number of backyard producers who have less control of the quality. Branded products from large-scale pig farms could gain advantages if they can differentiate their products in the market. China’s WTO accession along with food safety concerns could facilitate foreign pork producers in entering the high-end of the Chinese pork market. Imported pork may satisfy the needs of high-end consumers, consumers in urban areas, and foreign tourists. However, whether or not local consumers will purchase imported pork is difficult to predict and this will depend on their disposable income growth, changes in consumer preferences, and other socioal-economic factors. Even under more favorable market conditions after WTO, foreign investors in the Chinese pig industry still seem cautious. Until now, limited amou Profiles of the Chinese Pig Industrynts of foreign capital have beenwere brought into breeding businesses and a few packing plants. It seems to be too early to evaluate the impacts of foreign investments. From television sets to laptop computers, all consumer products have become, to some degree, commodities in China now. The question is: Can foreign pork producers entering the Chinese market differentiate their product? If not, imports are unlikely as competition on price is difficult. In many aspects, the current industry is quite efficient at delivering product from the farm to the table. Processing, marketing and transportation costs are often relatively low. Cold storage facilities are limited and the fresh pork market is still predominant. As demand increases it is more likely that the demand for pork will be met internally. Pork production has a very long history in China and farms can be placed in rural areas quite easily. Farms will be placed where grain supplies are adequate and markets are available. The massive infrastructure investments in China haswill allowed greater ease in transportation of these grains and also sales. In many ways it can be argued that China is more likely tomay become an exporter of pork, especially of loins, as the industry matures.
References and data sources
Bob Morrison and John Deen, Trip Report to U.S. Grains Council, 2002
China Breeding Swine Information Network, www.chinaswine.org.cn
China Ministry of Agriculture Information Center, Price information of Livestock Products, 2000 - 2002
Guangdong Swine Industry Magazine 2000-2002
National Bureau of Statistics of China, China Statistics Year Book, 1997-2002
USDA, China’s Food and Agriculture: Issues for the 21st Century, April 2002
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