W2 Pork Update: Pork Prices Decline in China, Brazil Seeks Expanded Trade

China's Pork Market Reverses, Leaving Producers in Trouble

Pork prices in China have defied seasonal trends, dipping below Jan-23 levels despite the anticipated surge leading up to the Chinese New Year on February 10. In W2, live pig prices averaged just USD 1.91 per kilogram (kg), marking a 10% year-on-year (YoY) decline. This weak performance reflects a significant oversupply of live pigs in the Chinese market, prompting expectations for further price drops in the near future. Notably, historical comparisons reveal significantly higher paychecks for pig farmers in previous years. Currently, both small-scale producers and large commercial farms are struggling to recoup production costs.

According to calculations by Beijing's agriculture department, smaller farms incurred average losses of around USD 20 per fattening pig in Nov-23. While larger, publicly-listed companies experienced somewhat lower losses per pig, the overall financial strain is undeniable. One prominent consequence is the ongoing contraction of the sow herd. The latest data reveals a 5.2% YoY decline in sow numbers, bringing the total down to 41.58 million in Nov-23.

The combination of weak demand and abundant supply is expected to exert continued downward pressure on pork prices in China, potentially extending the pain for struggling producers. While concerning, the shrinking sow herd could eventually contribute to market rebalancing. However, a sustained price slump could further challenge the viability of smaller farms, altering the long-term landscape of the Chinese pork industry.

Lower Pork Prices in China Helps Moderate Inflation

A key indicator of inflation, China's consumer price index (CPI) exhibited signs of moderation in Dec-23, declining by a narrower 0.3% YoY compared to a 0.5% YoY dip in Nov-23. This suggests potential stabilization trends despite remaining inflationary pressures. A National Bureau of Statistics (NBS) statistician attributed the improved Dec-23 performance to a combination of factors. The pre-holiday cold wave reportedly led to increased demand for certain goods, while lower pork prices helped mitigate the overall inflation rate. Notably, pork prices, a crucial component of the Chinese consumer basket, plunged by 26.1% YoY in December, dragging the CPI down by 0.43 percentage points (pp). Despite the pork-driven pullback, non-food prices continued their modest upward trajectory, rising 0.5% YoY in Dec-23 and contributing 0.38pp to the CPI. Excluding volatile food and energy components, the core CPI maintained a steady and moderate increase of 0.6% YoY last month.

Furthermore, Dec-23 witnessed a positive 0.1% month-on-month (MoM) growth in the CPI, reversing the 0.5% MoM decline observed in Nov-23, underlines the potential stabilization of inflationary trends. However, ongoing geopolitical uncertainties and lingering supply chain disruptions pose potential risks to China's inflation outlook. Additionally, the Producer Price Index (PPI), which measures producer prices at factory gates, continued its downward trend in Dec-23, registering a 2.7% YoY decline and a 3% decline compared to 2022 as a whole.

Brazil Gears Up for New Round of Chinese Meat Plant Audits

The Brazilian Association of Slaughterhouses (ABRAFRIGO) announced that 28 Brazilian meat processing facilities will undergo virtual audits by the General Administration of Customs of China (GACC) starting January 15, 2024. This second round of inspections marks a crucial step in securing export authorization for Brazilian beef, pork, and poultry to the lucrative Chinese market. Estimated to last for two weeks, the upcoming virtual audits will assess the compliance of 20 beef plants, eight poultry plants, and one pork plant with Chinese food safety regulations. In total, 29 facilities across various companies will face scrutiny.

This audit follows a previous round of physical inspections conducted by Chinese officials on Dec-23, where eighteen Brazilian plants were evaluated. Three previously authorized establishments underwent revalidation, while fifteen new facilities entered the qualification process, with 11 being beef plants and four poultry plants. The Brazilian government anticipates final announcements regarding qualified plants during the commemoration of 50 years of diplomatic relations between Brazil and China throughout 2024. Currently, 79 Brazilian beef, pork, and poultry slaughterhouses await GACC authorization, highlighting the substantial potential for expanded trade between the two nations.