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Food & Beverage

Chinese pork producers on a tear amid coronavirus outbreak

Surging prices bring windfall for companies but headaches for Beijing

Disruptions in logistics and transportation due to the coronavirus have slashed China's live hog supply and pushed up consumer prices drastically.   © Reuters

TOKYO -- The coronavirus outbreak that has battered Chinese business has left one surprising winner standing: pork producers.

Companies like Muyuan Foods are seeing a record jump in revenue despite low production volumes thanks to a surge in prices owing to the deadly outbreak. But this is fermenting the risk of inflation just as the economy heads south, leaving Beijing with a dilemma on its hands.

Henan-based Muyuan said it sold 1.395 million live pigs in January and February, 31% fewer than the same period last year -- but its revenue was 2.56 times higher at 4.62 billion yuan ($661.5 million).

Since the date of Lunar New Year period -- China's biggest season for consumption -- varies from year to year, it is customary to combine data for the first two months to avoid statistical discrepancies.

Pork producers' revenue is surging despite depressed production thanks to a rise in unit price of pork. Shenzhen-listed Muyuan sold its pork at 32.50 yuan per kilogram in February, compared to just 9.60 yuan a year ago.

Overall production was already under stress due to an outbreak of African swine flu last year, a disease fatal to pigs but harmless to humans. The novel coronavirus has only exacerbated the situation.

"The normal sales activities of pork in the downstream were impacted to a certain extent since February, as logistics and transportation were affected by the novel coronavirus," according to the March 7 disclosure by New Hope Liuhe, a Shenzhen-listed unit of a local agricultural conglomerate New Hope Group, which tripled its revenue to 1.931 billion yuan during the first two months of the year.

Among the 12 companies listed in Shenzhen or Shanghai that disclosed both monthly production and revenue data for their pork businesses as of Tuesday, 11 saw revenue rise during January and February.

The windfall is even more remarkable at smaller players like Ningbo Tech-bank. The Zhejiang-based company’s production fell 44% by volume on the year, putting it at about a fifth of Muyuan's volume, but its revenue increased 4.6 times to 889 million yuan. For Ningbo, the continued upswing in pork prices has turned its fortunes around more drastically. It issued a notice on Feb. 29 that it expects a net profit of over 120 million yuan for 2019, from a 571 million yuan net loss the year before.

"The main reason for returning to profit is the substantial surge in revenue and profit in the live swine breeding business," the company board said in a statement.

Jiangxi Zhengbang Technology likewise issued an earnings upgrade, saying its annual revenue for 2019 is expected to be 15% higher than a year before, while its bottom line will be about nine-fold higher, to approach 1.7 billion yuan. The company is taking this opportunity to prepare for an expansion in its production capabilities, which was reflected in a 46% jump in total assets to 31 billion yuan at the end of last year.

Wens Foodstuff Group, one of the largest players in the industry, also anticipates its net profit to be 3.5 times higher, at 13.9 billion yuan, in 2019.

Yang Tianming and Feng He, analysts at Huatai Securities, foresee Wens’ bottom line growing 2.3 times to 32.387 billion yuan this year. The analysts upgraded their outlook for hog sales, while reiterating a buy rating for the company on Feb 26.

While Chinese swine breeders are celebrating their jackpot, Beijing policymakers are likely less thrilled. The consumer price index in February rose 5.2% on a year-on-year basis, which is slightly lower than 5.4% in January but much higher than it was last year at 1.5%.

Since pork is the main source of protein in typical Han Chinese households, a rise in pork prices directly impacts the overall price level. For February, pork prices alone were responsible for 3.19 points of the increase in the overall CPI.

As many economists point out, the February price index in China tends to drop, after two months of stocking up in December and January. Ting Lu, chief China economist at Nomura International in Hong Kong, estimates that there is usually a 1.5% drop in February, so this year’s reading "was actually unusual," Lu said, as it was only 0.2 points lower than the January reading.

"By any measure, we believe this set of numbers is too high for policymakers to manage," Kevin Lai, chief economist at Daiwa Capital Markets based in Hong Kong. The coronavirus outbreak has disrupted not only manufacturing, but agriculture and transportation as well. "Many farmers are unable to send their produce to wholesalers and retailers, while households have rushed to stock up on items," he added. The most typical produce being pork.

A strong CPI rise could restrict Beijing’s options going forward. "If policymakers go ahead and offer a policy cocktail to stimulate demand while supply capacity continues to suffer, the result would be more inflation pressure being created," Lai warned. Since headline inflation has been hovering around 5% for three months, "Household inflation expectations could change rapidly in the current environment. It is therefore equally important for the [central bank] to manage these expectations, in our view," he added.

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