Weak Hog-Price Rebound to Limit Chinese Breeders’ Profitability

Fitch Ratings-Beijing-12 August 2021: Chinese hog breeders’ losses are likely to narrow in 2H21, but margin improvement is likely to be limited as the recovery in hog prices will be modest and production costs remain high, albeit declining, says Fitch Ratings. The extent of the margin improvement will depend on the increase in hog prices and pace of cost reductions.

Strong herd recovery, weak seasonal demand and a sell-off of heavy hogs resulted in slumping hog prices and caused net losses for the majority of Chinese hog breeders in 1H21. Hog breeders with low capacity utilisation and a large volume externally procured piglet reported larger losses due to higher production costs. Weaker operating margin and cash flow generation are likely to push up leverage, leading to deterioration in financial profiles.

Government intervention halted the decline in hog prices, with prices rebounding from early July and the recovery is likely to extend into 2H21 as demand is typically strong in winter. However, we expect the average hog price for 2H21 to be lower than 1H21’s given large supply as hog herds continue to recover. Growing capacity utilisation and gradual consumption of externally sourced piglets will help to lower production costs, while high feed cost – the major cost item – will continue to weigh on hog breeders’ profitability.

FitchRatings

Tags: China