Investment strategies for the next pig cycle are on the way.

Today I saw a friend share their views on investing in the pig cycle, and I thought I'd share them with you all, and also share my own thoughts.

(1) The current average price of pork in China has reached 9.4 yuan/kg (data source: Steel Union). It has long since fallen below the cost line of even leading breeding companies, such as Muyuan's 11.4-6 yuan/kg (data from the end of last year). The downward range has been sealed in a narrow range.

(2) The state continues to issue first-level warnings, and stockpiling seems to be underway.

The industry has once again entered a period of deep losses. The data in the chart below is taken from Steel Union Data.

The situation of domestic breeding sow production capacity can be seen from the meetings convened by relevant departments to pig enterprises from last year to now. Even now, the situation is not obvious, not to mention that in the past two years, the average PSY (number of weaned piglets provided by sows) has generally increased from 22 to 25-27. This amount of sow reduction is simply not enough to show any difference.

His strategy is to build positions in batches, starting at the bottom of the price range and then adding to his positions as production capacity decreases.

Firstly, I personally agree with his observations on the hog market and his understanding of this hog cycle. Continued deep losses will inevitably force hog companies and farmers to reduce production capacity, so this logic makes sense.

I would like to add a few points:

(1) Firstly, the closure of the Strait of Hormuz has left many Northern Hemisphere countries without fertilizer during the crucial spring planting season. Many may not know that while strategic oil reserves are normal for a country, strategic fertilizer reserves are not. Therefore, given the current situation, we can expect that grain prices will generally rise to some extent this year. Furthermore, due to increased transportation costs, the prices of some feed grains have already increased.

PS: One more point to add: Although China had a bumper corn harvest in the main producing areas of Northeast China last year, the grain was severely moldy due to prolonged rainfall in other regions and a lack of drying machines. So, in total, there was basically no bumper harvest last year.

(2) There is a high probability that La Niña will turn into El Niño again this year, which may exacerbate the decline in grain production in some regions.

(3) In addition, if China decides to use force to unify Taiwan this year, then stockpiling pork as military food is inevitable.

However, points 2 and 3 are still uncertain, but that doesn't preclude the expectation that things will proceed in this direction. Based on this expectation, it seems that reducing pig production capacity is a foregone conclusion, but this strategy carries two risks:

(1) Leading pig enterprises can hold on for a while longer and try to clear out small and medium-sized enterprises from the market in order to seize their market share. This means that the bottom of the pig cycle may be prolonged.

(2) With further weakening of consumption, coupled with the approach of summer (traditional off-season for pork), although pork is cheap enough, chicken and some fish also have advantages. If this coincides with the lack of active destocking by pig enterprises, it will prolong the bottoming-out period.

(3) Although the government recently claimed that it would start stockpiling, it should be noted that pork prices are related to the CPI. It is fine to take advantage of the opportunity to buy the dips at the bottom (in normal quantities). Excessive stockpiling will suppress the space for monetary policy. The government's interests need to be taken into special consideration.

I think the strategy is sound so far, but the market certainty is still a bit lacking. Trying a small position now shouldn't be a problem (note the difference between stocks and futures). However, the characteristic of the domestic pork cycle is that pork prices are more likely to fall than rise, and price increases are usually quite rapid, which is often related to state-owned capital involvement.

However, due to the high reproductive rate of sows, the likelihood of continued production increases after this round of culling is relatively higher.

For pig farming companies, keep an eye on those with high debt, high breeding costs, and low profit margins. —Take a closer look at what these companies are doing.

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