We believe that the 70% tumble in China’s live pig price (to CNY10.94/kg as of Sep 27) in nine months is excessive given the large-scale pork operators’ production cost of CNY15-16/kg. With the USDA’s recent projection of a 5% drop in hog production and a 14% decline in pork output for 2022, we think that the current price level of CNY11/kg is the nadir with an expected bounce to CNY20-25/kg in 2022. Although CTI is likely to operate at loss and will be a burden for CPF in 3Q21, we expect China’s pig prices to rebound in 2022. Our TRADING BUY rating on CPF stands, premised on livestock price rebound in 2022 and its cheap valuation.
China’s hog and pork production to drop in 2022
Based on its GAIN (Global Agricultural Information Network) report titled China: Livestock and Products Annual on Aug 26, 2021, USDA released hog and pork projections for 2022 for the first time this year. It projected that China’s hog production will drop 5% in 2022 (from 580m to 550m heads) due to: 1) low piglet inventories and smaller sow herds resulted from delayed restocking in 2021 and significant slaughters prompted by fears of ASF outbreaks in 2021, 2) smaller profit margins from the pig price tumble and 3) the anticipated government price controls in 2022. In effect, a smaller hog herd and lower pork profits will limit the pork production in 2022. USDA forecast that China’s pork output will drop 14% in 2022 (from 48m to 41.5m tonnes). We believe that the government’s policies to control pork price increases will dissuade new pork producers from entering the market.