The game of "oligarchs" in the era of "micro profit" in which the three giants of pig farming have sold over 100 million pigs

This pig cycle is going through a long downward period, and the entire industry is in a loss making state. However, top companies still maintain an expansion trend. According to the latest disclosed data, the three major pig farming companies in A-shares - Muyuan Group, Wenshi Group, and New Hope - have surpassed the 100 million head mark for the first time in 2023, with their respective sales figures reaching historic highs.

Several industry insiders told reporters from China Business News that the rapid expansion of large-scale pig enterprises is one of the important drivers of overcapacity. However, relying on their capital and financing advantages, they did not decisively reduce production during the industry's loss stage, resulting in the "deep losses, high debt, and slow down" characteristics of this pig cycle.

The reporter noticed that several leading companies have disclosed their financing plans and increased their capital reserves through asset recovery and other actions.

Wang Zuli, Chief Expert of Monitoring and Early Warning for the Pig Industry of the Ministry of Agriculture and Rural Affairs, stated that in November 2023, the number of sows capable of breeding in China was 41.58 million. When the number drops below 41 million heads, the industry's upward cycle may begin. It is expected that the entire industry will enter a profitable period in the second and third quarters of 2024.

This also means that many large-scale enterprises and individual investors need to comprehensively evaluate the security of their own funding chains to ensure that they can overcome difficult stages.

Overcapacity leads to industry losses

Livestock farmer Cui Yongqiang owns a small pig farm in Henan with an annual output of three to five hundred pigs. In the past three years, due to the low price of pigs, he has gone through two rounds of clearance. Currently, only two out of the five or six existing pig farms in the surrounding area remain.

Based on the experience of past pig cycles, it has become almost normal for retail investors to exit first during the downward phase of pig prices. Moreover, the period of losses in this round is relatively long. According to data cited by the Farmers' Daily, from January to November 2023, the average loss of pig farming heads was 73 yuan. 2023 will be the first year since 2014 to experience a full year loss in the general ledger, putting significant operational pressure on the industry as a whole.

Xu Hongzhi, senior analyst at Brick Agricultural Products Procurement Network, told reporters that pig production capacity is closely related to the number of sows that can be bred. The production capacity of sows in China decreased by over 30% to less than 30 million heads in the spring of 2019. This caused the price of live pigs to rise to 40 yuan/kg at one point that year. The huge profits have driven multiple forces to enter the aquaculture industry, and have led to a rapid recovery in production capacity. In 2020, it has returned to normal levels, reaching a peak of 48 million heads by June 2021, and then entering the stage of reducing production capacity.

Until now, the entire aquaculture industry still has overcapacity. Gao Yuanfei, Vice President of Yangxiang Co., Ltd., once wrote that the available pig production capacity in China is about 1 billion pigs per year, while the actual demand is around 700 million pigs.

The expansion of large-scale pig enterprises is the main reason for this round of overcapacity, "said Xu Hongzhi." The overall production capacity of the industry will decrease by 5% in 2023, a decrease of about 5%, and the overall production capacity of listed pig enterprises will still increase.

The latest disclosed data shows that in 2023, Muyuan Group, Wenshi Group, and New Hope's annual sales of live pigs were 63.816 million, 26.2622 million, and 17.6824 million respectively, totaling over 100 million pigs. Meanwhile, the pig sales data of the three companies have all reached a historic high.

At the same time, enterprises such as Da Bei Nong and Tang Ren Shen have already surpassed the previous year's sales volume in 2023.

In 2022, the sales volume of 20 listed pig companies will account for 18.5% of the national total, and it is expected to exceed 20% in 2023. Moreover, their production capacity has not been fully released, and there is still room for further improvement in the future. Considering the current situation, there is a problem of rapid scaling in the industry, and the market share of large-scale pig companies should remain stable and not continue to increase rapidly, "said Xu Hongzhi.

Behind the slow production capacity reduction

According to the observation and research of Jing Shu, the chief analyst of Zhuyi Network, retail investors in Shandong, Henan and other places have significantly withdrawn, and many breeders have directly abandoned their pigs, waiting for the pig prices to rise in 2024 before conducting secondary fattening. Xu Hongzhi also told reporters that in 2023, the industry's capacity reduction will mainly come from individual investors. Its capacity reduction is much larger than that of large-scale enterprises.

In fact, in the past multiple pig cycles, the inflow and outflow of individual investors have driven fluctuations in the entire production capacity. However, in this round of pig cycle, the increase in production capacity is more due to large-scale pig enterprises. However, considering the number of stocks sold by such enterprises, their attitude towards reducing production capacity is relatively vague.

Zhu Zengyong, a researcher at the Beijing Institute of Animal Husbandry and Veterinary Medicine of the Chinese Academy of Agricultural Sciences, told reporters that the development strategies of leading enterprises are less affected by the current fluctuations in pig prices. Their likelihood of reducing production capacity is relatively low, and they are more likely to maintain stable production.

The logic behind the slow reduction of production capacity by large-scale pig enterprises is that they will kill their competitors, overall production capacity will decline, pig prices will rebound, and they can obtain excess profits by expanding their production capacity in advance. Therefore, many large-scale pig enterprises are conducting financing actions to maintain production capacity and wait for the market to recover, "said Xu Hongzhi.

According to incomplete statistics from reporters, in the past year or so, companies such as Muyuan Group, New Hope, Wenshi Group, Tianbang Group, and Superstar Agriculture and Animal Husbandry have all taken financing actions, including private placement fundraising and asset sales to recoup funds.

It is worth noting that while many companies are waiting for the market to improve, their debt ratios continue to rise. According to a research report by Southwest Securities, the overall debt ratio of the pig farming industry has risen from 53.5% at the beginning of 2021 to 68.3% in the third quarter of 2023. In addition, due to the continuous decline in the prices of live pigs and piglets after August 2023, the industry's debt ratio is expected to further increase in the fourth quarter.

Currently, several companies have debt ratios exceeding 70%. Among them, Zhengbang Technology has a debt ratio of 162.61%, while Aonong Biotechnology and Tianbang Food have debt ratios exceeding 80%. In addition, Jingji Zhinong, Huatong Shares, New Hope, Jinxinnong, and New Wufeng have debt ratios exceeding 70%.

Some companies have fallen behind in this round of capital dimension competition. Zhengbang Technology has undergone restructuring due to debt crisis, and its twin, both private enterprises in Jiangxi, have officially taken over recently. Aonong Biotechnology also encountered a debt crisis and attempted to "sell itself" to Da Bei Nong, but ultimately failed to succeed. The two companies that have lost their financial advantage have both experienced varying degrees of capacity reduction.

Wang Zuli told reporters that in November 2023, the number of sows capable of breeding in China was 41.58 million. When the number drops below 41 million heads, the industry's upward cycle may begin. It is expected that the entire industry will enter a profitable period in the second and third quarters of 2024.

This means that large-scale pig enterprises that are unwilling to significantly reduce production capacity need to continue to persist for a longer period of time while ensuring financial security in order to get rid of losses.

Struggling to reduce costs and increase efficiency

For the pig farming industry, fluctuations have almost become the norm. In the past few years, there have been numerous companies that have capitalized on the cycle and made a fortune, while others have misjudged the cycle and suffered delisting or bankruptcy.

If you catch up with a good market, you can earn money for three years in a year. If you catch up with a bad market, not only will you work for nothing in a year, but you can also lose the profits of the previous years. If you calculate the long-term account, the profits are not really high, "said Cui Yongqiang.

The reporter noticed that many leading enterprises have begun to reflect on the profitability of the pig farming industry.

Qin Yinglin, Chairman of Muyuan Group, has publicly shared his observations. The pig farming industry has a cyclical profit margin of about plus or minus 10%. However, dividends are a trap and should not be taken as ability or strength. Pursuing profits carries risks, so one should not act as a backer

Wen Zhifen, Chairman of Wen Group, mentioned at the 2023 Pig Industry Forum that the average sales profit margin of 20 listed pig companies in the past 10 years was 4%. Considering the volatility risks in the market, the industry needs to consider whether opportunities and risks are equal, and from the perspective of investment returns, whether pig farming is worth investing in.

Zhu Zengyong told reporters that with stable production capacity and minimal fluctuations, pig farming has entered the era of low profits. The characteristics of aquaculture are inherently long-term and micro profitable. In general, it is normal for a 120kg fat pig to be slaughtered and the annual profit level to be between 150-200 yuan/year/pig

The main criteria for judging the industry entering the era of low profits are: overcapacity is difficult to eliminate, pig prices are prone to fall but difficult to rise; at the same time, breeding costs remain high under the influence of multiple factors such as the epidemic, environmental protection, and financing. The era of low profits is actually the result of the industrial structure adjustment of the breeding industry, "said Xu Hongzhi.

Therefore, more and more breeding enterprises are starting to compete in cost reduction and efficiency improvement.

It is reported that several leading companies are competing in the technology of healthy and efficient feed and low protein diet, hoping to reduce the cost in the feed process. In addition, Muyuan Group has proposed a strategy of "there is still room for a cost reduction of 600 yuan"; New Hope holds a "Profit Pool Mining Work Conference" to improve the efficiency of every production process and seek profits and cash flow internally; Yangxiang Corporation continues to make efforts in building pig farming.

Multiple interviewees mentioned that the competition in the pig farming industry in the future will be multidimensional, including breeding technology, biological prevention and control, management efficiency, financing ability, etc. The entry threshold for the industry will become increasingly high, market fluctuations will gradually decrease, and the profitability of the entire industry will also tend to stabilize.