China’s blue-chip hog company faces financial stress amid weak pork prices

Shares of Muyuan, the largest publicly traded hog producer in China, slumped in early trade falling over 6% after the company said nine of its 31 subsidiaries still had overdue commercial papers that hadn’t been paid to 384 counterparties.

They reported that the outstanding amount was CNY7.56 million (USD1.19 million) down from CNY17.1 million at the end of November. Yesterday the company reported that its November sales totalled 3.87 million hogs, with a revenue of 6.8 billion yuan. The average sales price for November was 15.96 yuan/kg, up 34% from the previous month.

The company’s monthly hog sales peaked in October at 5.3 million head when the average price had fallen to only 11.88 yuan/kg.

Large hog companies in China have been racing to expand and grab market share since ASF wiped out around half of the country’s hog herd back in 2018. With expediated planning approvals and generous financing from state-owned banks, these firms were able to rapidly expand, paying premium prices for piglets and offering generous salaries to new college graduates.

This rapid expansion also meant these companies were taking on large amounts of debt to finance the growth. At the start of 2021 hog prices were over 36 yuan/kg and hog producers were extremely profitable.

Prices continued to fall in the past three quarters of 2021 to reach 10.60 yuan/kg in October, pushing all producers deep into loss-making territory as most of them maintained a debt-heavy expansion approach.

Large breeding operations now account for 57% of piglet production, up from only 47% in 2017.

The majority of China’s hog industry suffered deep financial losses in the second the third quarter of 2021 due to a sharp fall of pork price in the country.

Muyuan’s Shenzhen-listed stock price slumped as much as 6% on Tuesday to hit the lowest level in two months, due to the reports of commercial paper overdue.

Disclosed financial records showed the company’s total liability hit nearly CNY98 billion by the end of Q3 2021, up 73% from the level at the end of 2020.

Current ratio, a common measure of a company’s short-term liquidity, for Muyuan fell 20 percentage points on the year to 71%, which is the lowest level in three years.

Unfortunately for many pig farmers, the over-supply situation seems unlikely to ease any time soon.

The current sow population in the country is 106% of pre-ASF levels, according to local Chinese newswire Economic Daily. Additionally, since March 2021, the number of piglets produced at large scale companies has exceeded 30 million per month. Accounting for a 6-month fattening period, there is still a lot of supply that will be hitting the market over the next quarter.

The market has been fundamentally changing with large-size breeding operations now account for 57% of piglet production in China, up from only 47% in 2017, Economic Daily also noted.

Large firms have obvious financial advantages and are less willing to reduce production due to short term market conditions. A big issue for small and medium-sized hog farmers has been that it is difficult to get loans or working capital for their business to expand.

If prices are low, they often simply have to sell. This is in contrast to large firms like Muyuan who can take on additional debt and continue to expand even during the down cycles. This leads to a situation where it takes more time to remove excess capacity in the market and may lead to this low-price cycle lasting longer.