Rabobank credentials - THE GLOBAL BUSINESS DIALOGUE

Report
Global Business Dialogue
The Chinese Pork Dilemma
David Nelson, Global Strategist
September 13, 2011
Rabobank International
Chinese consumers diversify their meat diet, but
pork will remain the staple meat
Comparison of Meat Consumption Patterns, 1985, 2008 and 2015F
100%
90%
6%
9%
80%
14%
14%
20%
22%
66%
64%
2008
2015F
70%
60%
50%
40%
85%
30%
20%
10%
0%
1985
Beef and mutton
Poultry
Pork
Source: MOA, Rabobank 2011
Market Developments & Outlook
2
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China pork consumption is already high,
indicating a limited volume growth potential
Per capita animal protein consumption
Kg/capita/annum
120
100
80
60
40
20
0
Poultry
Pork
Beef & Sheep meat
Source: USDA,FAO 2011
Market Developments & Outlook
3
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Meat Prices Drive Chinese CPI
Index of CPI, CPI food, and CPI meat
160
150
140
130
120
110
100
90
80
70
60
CPI
CPI Food
CPI Meat
Source: China Statistics Bureau, Rabobank
Market Developments & Outlook
4
Rabobank International
2.00
Market Developments & Outlook
5
Source: Bloomberg
Rabobank International
9/1/2011
7/1/2011
5/1/2011
3/1/2011
1/1/2011
11/1/2010
9/1/2010
7/1/2010
5/1/2010
3/1/2010
1/1/2010
11/1/2009
9/1/2009
7/1/2009
5/1/2009
3/1/2009
1/1/2009
11/1/2008
9/1/2008
7/1/2008
5/1/2008
3/1/2008
1/1/2008
11/1/2007
9/1/2007
7/1/2007
5/1/2007
3/1/2007
1/1/2007
11/1/2006
9/1/2006
Losses reduced hog production
China Hog to Corn Ratio
14.00
12.00
10.00
8.00
6.00
4.00
New Investment Program
Under the umbrella of China’s 12th 5-year plan a RMB 2.5b (US$390m)
investment program to support large scale pork farms in June.
The investment will be aimed to improve:
Research and development
Infrastructure and transportation
Genetics
Breeding
Market Developments & Outlook
6
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Two of the big issues to overcome are disease…
Disease is endemic, though magnitude comes and goes
Chinese provinces with identified FMD outbreaks as of January 27, 2011
Market Developments & Outlook
7
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… and productivity
Hog rearing performance in China and Europe,2010
KPI
China
Europe
FCR
3.2:1
2.5:1
Hog/sow/year
13
23
Birth to sale
180 days
150 days
Weight
90Kg
115Kg
Source: Rabobank 2010
Market Developments & Outlook
8
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Inventory is low but turning up
Hog and sow monthly inventory (Jan 2009- Jun 2011)
Production
improvements
could be
meaningful near
year end
Million head
480
51
470
50
49
460
48
450
47
440
46
430
45
Hog Inventory
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
43
Mar-09
410
Feb-09
44
Jan-09
420
Sow (adult female swine) Inventory
Source: MOA
Market Developments & Outlook
9
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China Fresh and Frozen Pork Import Volume
Metric tons
Source: BSNABC
Market Developments & Outlook
10
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Imports showing long-term uptrend
We believe China’s pork imports could rise substantially
China pork imports (offal and meat), 2004 to 2011
1,500
1,000
500
-
Offal
Meat
Source: China Customs
Market Developments & Outlook
11
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Consolidation of hog farming
China Hog Farm Size,2001-2013F
Million tons/production
60
50
7%
5%
40
21%
12%
15%
36%
51%
30
55%
20
74%
57%
37%
10
30%
0
2001
2005
2009
Commercial farm (Above 3000 heads/farm)
2013F
Specialized farm (50-3000 heads/farm)
Backyard farm (1-49heads/farm)
Source: MOA, Rabobank 2011
Market Developments & Outlook
12
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Rabobank believes that China’s self-sufficiency in
corn may be coming to an end.
China Corn Deficit
China adds a
potentially bullish
wild card to the
corn market.
Million metric tons
25
20
15
10
5
Base
Highest
15/16 F
14/15 F
13/14 F
12/13 F
11/12 F
10/11 F
09/10
08/09
07/08
06/07
05/06
0
Lowest
Source: Rabobank
Market Developments & Outlook
13
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Consolidation of slaughtering segment
China’s domestic pork slaughtering segment,2010 VS 2020
70
60
50
20%
40
30
70%
45%
20
10
25%
35%
5%
0
2010
2020
Slaughter by hand
Half Mechanised
Mechanised
Source: Rabobank 2011
Market Developments & Outlook
14
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Subsidy plays an important role
Subsidy disclosures by key players
Key players
Yurun
New Wellful
Shineway
Shunxin Agro
Subsidies, 2010
(Million RMB)
Net profit, 2010
( Million RMB)
Subsidy to net
Types of subsidies
profit (%)
606.63
2266.00
26.77%
79.98
14.77
541.39%
1.Acquisition & Merger Fund from
government
2. Supporting fund of Agro-food
industrialization
3. Subsidy on banking loan interest
4. Subsidy on hog breeding
5. Subsidy on new slaughtering capacity
1. Live hog reserve subsidy
2. Supporting fund of export brand
3. Science and technology subsidy
4. Sow subsidy and frozen pork reserve
subsidy.
33.01
1089.28
3.03%
1.Special fund of hog industrialization
project
2. Subsidy on hog breeding
3. Supporting fund for R&D on new
technology of bone and blood processing of
livestock
4. Tax rebate on procuring domestic
equipments
5.14
265.35
1.94%
local government financial support
Gaojin
43.33
22.29
194.42%
Chuying
10.19
122.97
8.29%
1. Live hog and frozen pork reserve
subsidy
2. Subsidy on banking loan interest
3. Government Bouty
1.Live hog and frozen pork reserve subsidy
2. Bounty of listed enterprise
3. Bounty of local backbone enterprise.
Source: Company data, 2011
Market Developments & Outlook
15
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Ambitious expansion by key players
Expansion plans of key players in China’s pork industry,2011
Estimated Investment
(Million USD)
Company
Location
Investment Type
Guangdong Wen's
Henan
Hog production
CP Group
Hu Bei, Shandong,
Guangdong
Hog production and breeding
850
Yurun
Heilongjiang, Shandong,
Shanxi, Guangxi, Anhui,
SiChuan
Breeding, slaughtering
465
80
New Hope Group
N/A
Hog production
0.5
Shineway Group
Jiangxi
Hog Production
180
Muyuan foodstuff Co.Ltd
Henan Province
Hog Production
320
Chuying Agro
Henan Province
Breeding farms
625
KangYuan food (Henan)
Co.Ltd
Henan Province
Raising, slaughtering, feed
processing, fresh and frozen
pork processing
500
Zhongpin Group
Hebei Province
Slaughtering
COFCO
Tianjin,Jiangsu,Wuhan
Pig farming bases, slaughtering
49
3120
Source: Company data, Rabobank 2011
Market Developments & Outlook
16
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The ranking of key pork companies
Positioning key pork companies by 2010 sales revenue
Million USD
8000
7000
6000
5000
4000
3000
2000
1000
0
Source: Company data, Rabobank 2011
Market Developments & Outlook
17
Rabobank International
Rapid growth projected for large packers
Slaughter Capacity of Key Players, thousand head/year
2006
2010
2013(F)
12,050
25,000
41,000
Shineway
8,000
19,000
50,000
New Hope
1,280
8,500
N/A
Gao Jin
2,500
5,000
9,500
Zhongpin
1,200
5,000
N/A
5,500
8,750
Yurun
COFCO
Source: Company data, Rabobank 2011
Market Developments & Outlook
18
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The End
Market Developments & Outlook
19
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Hog production profitability has great volatility
Live hog rearing profit, Mar 2008-Jun 2011
RMB/head
1000
800
600
400
200
0
-200
Hog rearing profitability (RMB/head)
Source: Shennong
Market Developments & Outlook
20
Rabobank International
Slaughterers/processors can play with the market
while farmers are the weakest link
Prices of piglet, hog, mark-up retail pork VS hog, mark-up wholesale pork VS
hog
45
40
35
30
25
20
15
10
5
0
Piglet
Hog price
Mark-up pork retail vs hog
Mark-up pork whole vs hog
Source: CAAA , Rabobank
Market Developments & Outlook
21
Rabobank International
Grain prices will be higher and more volatile

The Black Sea region has become the world’s incremental supplier, and
production in the region is inherently volatile due to weather (and politics
can be volatile too).

China, India, Indonesia and Brazil have over 3 billion people and have
economies growing at 6-10%

Accessing incremental acreage is difficult due to lack of infrastructure and a
variety of governance issues (e.g. property rights).

Accelerating meat demand in developing markets is accelerating grain
demand, at a time when productivity (yields) are decelerating globally.

The bottom line: we have moved from an environment of structural grain
surplus to one of challenging demand growth.

The new normal: we believe prices will gravitate around cost of production,
which is now near $5/bushel for corn and $12/bushel for soybeans.
Market Developments & Outlook
22
Rabobank International
Increasing pork imports
China pork meat and by-products imports, 1996-2010
Thousand metric tons
1,000
900
800
700
600
500
400
300
200
100
0
Pork by products (HS 020630 and 020649)
Fresh, chilled, frozen pork (HS 0203)
Source: UN Comtrade, BOABC
Market Developments & Outlook
23
Rabobank International
Slaughtering profitability has seasonal movement
Mark up between live hog price and halved carcass price
RMB/head
25.0
5.0
22.5
4.5
20.0
4.0
17.5
3.5
15.0
3.0
12.5
2.5
10.0
2.0
7.5
1.5
5.0
1.0
2.5
0.5
0.0
0.0
Live hog price
Price of halved carcass
Difference
Source: Shennong
Market Developments & Outlook
24
Rabobank International

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