2019 marks the 70th anniversary of the Founding of the People’s Republic of China. But, for the average consumer in the country, it may be remembered for the soaring prices of the country’s great staple – pork. The disruption caused by African swine flu has had catastrophic consequences for China’s food supply – pork prices have risen 70% in the past year and the average pork price paid by wholesalers is up 85% since August. This has pushed up Chinese inflation to 3% in September, from 2.8% in August.
In this pork bubble, there is a sharp divergence between the performance of pork producers and processors. Shares of Chinese pork producers such as Muyuan Foodstuff, Cofco Meat, Wens Foodstuffs have risen sharply. In contrast, companies that use pork inputs for processed products such as WH Group and Charoen Pokhpand Foods have weakened.
The market is now positioning for a further rise. Soochow Bank has predicted a further 40% rise to CNY30 (US$4.20) per kg. This is assuming a severe shortage where China’s pork production falls by over 20%.
However, we disagree. Pork prices may not remain at these elevated levels, and a sharp correction could be in the offing. The government has announced moves to spur pig farmers to breed more hogs. In mid-September, it was announced that 10,000 tonnes of pork would be released from the central reserves to curb prices.
What’s more, the soaring prices have already led to exceptional measures. Local governments are offering discounted pork. For example, in Nanning people are limited to 1kg of pork. In Fujian, subsidised pork is on offer.
We think pork processors seem to have been mispriced in the wake of the African swine flu outbreak. In our view, they have unjustly underperformed – these companies are highly branded and have excellent cash generation. Previous outbreaks of swine flu in 2009 and bird flu in 2013 were buying opportunities in the space, but investors need to look beyond the disease. Pig prices may be flying high, but we believe the laws of gravity will catch up with the pork producers.