China has experienced three complete pig cycles since 2006
From the perspective of cycle operation duration, the total duration of each cycle is about 4 years. The first round of downward cycle is 2 years and 2 months, the second round is 2 years and 9 months, and the third round is 2 years, showing the law of cattle short and bear long. If the current cycle is divided by the highest pig price in 2019, the downward stage has reached 2 years.
Review the old and know the new: the adjustment of periodic logic in the post non plague Era
The stock of fertile sows deviates from the price transmission signal. The improvement of large-scale pig breeding industry is accompanied by the improvement of pig breeding efficiency, which is specifically reflected in the reduction of the demand for the number of commercial pigs, and the improvement of Psy further reduces the requirements for the number of fertile sows.
The diseconomies of scale in the pig breeding industry are not conducive to the clearing of production capacity. After the outbreak of African classical swine fever, some free range farmers with excellent breeding achievements have gradually grown into a group of family farms and agricultural cooperatives with moderate scale. When large-scale breeding enterprises lose cost advantages compared with small and medium-sized farms, and the volume of free range farmers has been greatly reduced, In the past, it was difficult to establish the logic that retail investors withdrew from the market first and realized capacity clearing in the downward cycle.
How to view the inflection point of pig price and cycle in 2022?
We still need to be vigilant against the consistency expectation trap of the pig market. ① Although mature breeding subjects have the ability to predict the market, they still can not get rid of the “Curse” of Pro cyclical production when they are really implemented in the stage of capacity adjustment. Therefore, the judgment of pig cycle and inflection point, based on the change of sow stock as the core logic, must be analyzed in combination with the change of industry structure and breeding end behavior mode. ② Based on conventional logic, it is easy for the market to form a consensus expectation of “pessimistic attitude towards Q1 and Q2 pig prices in 2022 and optimistic about the performance of pig prices in the second half of next year after the elimination of breeding sows”. However, once this expectation is formed at the breeding end, there is likely to be collective bar pressing in the industry to avoid the operation of seasonal off-season and cycle trough. ③ The development of the above logic will eventually lead to the fact that the “price bottom” in the cycle is not as deep as expected, and the inflection point of pig price rise is restrained due to the backward movement of marketing pressure, and the final price will float up and down near the breakeven line for a long time.
The cumulative contradiction between long-term high cost and high supply may amplify the marginal effect of capacity deregulation. ① The high feed cost may continue to restrain the demand for supplement in the downstream. In 2022, affected by the expectation that the supply and demand situation of China’s staple grain will continue to be tight, the feed cost may continue to maintain a high level. Even if the production capacity does not continue to be cleared in a large area, it is still possible to continue to inhibit the willingness to fill the column at the breeding end and finally transmit it to the commodity end. ② We believe that the industry needs new contradictions to stimulate the arrival of the inflection point of the cycle. At present, the average asset liability ratio of pig breeding industry far exceeds the high point in previous cycles. Next year, if the pig price continues to fluctuate near the breakeven line, the centralized overdraft may occur again in the later stage of large-scale pig farms in order to recover funds, which may cause strong phased downward pressure on the pig price at that time; If the financing environment deteriorates during the period, it is not excluded that the production capacity and operation of some enterprises will be adjusted more than expected.
Investment suggestion: we believe that as long as the capacity has not undergone in-depth de transformation, we do not have to worry about the specific time nodes at the inflection point of the cycle, but dynamically observe the mechanism through which the market will resolve the contradiction of overcapacity. If the downward cycle is longer than expected, considering the high capital time cost and opportunity cost, stocks with growth attributes in the cycle have more value of layout in advance. We suggest paying attention to the breeding enterprises with both “financial stability” and “performance flexibility”, that is, on the premise of strictly controlling the operating leverage, they can still steadily promote the original production expansion plan, use the futures varieties related to pigs and feed raw materials to hedge the future production capacity position, smooth the operating risk, and have excellent ability to adjust cash flow across cycles. It is recommended to pay attention to the company: Tangrenshen Group Co.Ltd(002567) , Wens Foodstuff Group Co.Ltd(300498) .
Risk tips: the spread of animal diseases and natural disasters have caused a sharp rise in the price of raw materials; Policy risk, etc.
