An important divergence has appeared in the Chinese economy which affects agriculture and food demand.
The industrial side of the economy is speeding ahead. Metrics such as exports, electricity demand, PPI, container rates, and industrial output are all showing strong growth. China’s factories are operating at high capacity and shipping goods around the world.
On the consumer side, things are not as optimistic. Retail spending on restaurants, restaurant performance, spending on at-home meals, hotel bookings, and flight travel are reflecting a preference for saving and staying local.
China’s zero-Covid policy is also unlikely to change in the near term. Even if China shifts the policy, it will likely still involve lockdowns, testing, and travel restrictions. This is going to continue to weigh on domestic tourism and retail spending.
From March 2020 through June 2021, China was getting back to normal. The consumer sector took a deep hit in the beginning of the lockdown, but steadily recovered.
In some ways, the consumer sector in China was turbo-charged during this period. There was pent-up demand and wealthier consumers who typically travelled outside of China for holidays were staying in the country and spending their money locally.
This changed in June 2021 when Guangzhou had the first outbreak of the delta variant. Since then, and compounded by the appearance of omicron, travel has become much harder.
Outbreaks and lockdowns can pop up expectedly. Delta has required a wider net when doing quarantine, and this means a greater risk of facing quarantine or travel restrictions.
Interprovincial travel is possible but has become more difficult.
The rules around required testing and local health code apps are constantly changing and difficult to track.
This has dissuaded people from travelling, as evidenced in the flight data and transportation statistics. For many people, it is simply not worth the hassle or risk.
From an agriculture perspective, less traveling is bearish for food demand.
People eat more when they go out to restaurants and during vacations or business trips, especially in China where food waste is an issue at restaurants. But these have both been hampered by Covid.
Hence, this has led to a shift among consumers to eating more at home instead of restaurants.
This trend has been very clear in the past quarter. Stocks of major restaurant brands continue to slump and many prominent players such as Haidilao or Element Fresh have either closed many outlets or went under.
Less pork demand, pre-made food boom
China’s hog herd has returned to pre-ASF levels, but margins are bad and most companies are losing money.
Part of the reason for this is that consumers have reacted to high prices over the previous three years and are simply eating less pork.
At the same time, there has been a frenzy into stocks making frozen or pre-made meals. While this stock mania has been overdone, the underlying data confirms this trend.
Major players including Meituan, Hema, and JD have all reported stronger sales of pre-made meals, particularly ahead of Chinese New Year as many people stay home instead of travelling to visit family.
While Covid has accelerated these trends, it is not the cause.
Younger consumers are welcoming more western diets, including less pork consumption, and more chicken and wheat products.
They are also marrying later than previous generations and are busier with work, which contributes to less cooking at home and more demand for pre-made and convenient dishes.
Consumers in China are going to retrench as the country works to contain outbreaks of Covid. Pork demand will see some gains due to the lower prices but is unlikely to exceed pre-ASF levels as restaurants see less traffic.
The hog sector will continue to try to shed its excessive capacity. This could lead to price rallies, but the industry as a whole is likely to fluctuate around breakeven.
Wheat demand is likely to be strong. Even if demand for wheat in animal feed falls, stocks have been falling in the past 18 months, and the current crop faces challenges.
Additionally, consumer demand for wheat products is higher and could result in more imports of high-quality wheat.
Corn imports will likely remain strong but might not exceed last year’s levels. China produced a record crop, but concerns about quality linger.
Domestic supply should keep China’s industrial processors well supplied, but corn will be imported into the south as high-quality feed ingredient.
Soybean demand might disappoint. Large hog firms lost billions of dollars in 2021 and are slashing capacity. Crush margins have been poor and firms will be cautious about importing too much given the uncertainty in the hog market and negative outlook for meal demand.