Use the production cycle of old domestic sows to deduce when the pig cycle bottomed out and the core logic

First, let's talk about the conclusion. The pig cycle has bottomed out, but it's notBest Choice.

The cycle bottomed out ≠ continued to rise sharply. The outbreak of the cycle required intervention from external conditions to disrupt the balance between supply and demand in a short period of time

Pork stocks had already risen by a small wave before the National Day holiday. Recently, pork stocks have continued to soar, driven by a change in market style. So has the pig cycle bottomed out? I think it's bottoming out, but bottoming out ≠ being able to rise sharply in the short term. First of all, we need to understand one thing first,The explosion of cyclical stocks is often caused by policies or other external conditions that suddenly disrupt the balance between supply and demandIf the optimization of production capacity in one's own industry alone is relatively slow, the stock price shows fluctuating bottom or fluctuating little by little.

Let's take a look back at a few cyclical stock explosions in recent years. For example, the crude oil explosion in 2016 was due to the OPEC war when US shale oil took the initiative to drastically reduce supply, leading to an imbalance between supply and demand, and crude oil stocks skyrocketed. Domestic resource stocks skyrocketed in 2017, mainly due to supply-side reforms and the initiative to drastically reduce supply capacity at the time, leading to an imbalance between supply and demand, and resource stocks skyrocketed.

The 2019 swine cycle broke out, mainlyOne-size-fits-all environment+swine fever epidemicAs a result, a large number of sows died, and the supply of pork was reduced, leading to an imbalance between supply and demand. Crude oil stocks plummeted in 2020, and oil prices fell to a negative number, mainly due to the imbalance between supply and demand due to the global economic shutdown at the beginning of the outbreak of the epidemic and taking the initiative to drastically reduce demand. The outbreak of coal stocks in 2021 was mainly due to carbon neutrality+the impact of the epidemic+one-size-fits-all environmental protection+ trade war with Australia, which took the initiative to drastically reduce the supply of coal mines, leading to an imbalance between supply and demand.

The current pig cycle is bottoming out because pork prices continue to fall, which has caused the industry to experience extensive losses, and the ability to breed sows (pork production capacity) has come to a standstill. In exchange for coal mines, coal mine prices have continued to fall, coal mining companies have experienced extensive losses, and the number of new coal mine production capacity has dropped drastically, and there is no increase, so everyone expects pork prices to fall inexorably. This is the core logic of the pig cycle bottoming out. However, to continue to rise sharply after bottoming out, it is still necessary for external conditions to suddenly disrupt the balance between pork supply and demand. Otherwise, if pork prices rise over time and pig farming becomes profitable again, then production capacity will increase again. If it depends on the industry's own adjustments, this game process will take place over and over again.

For example, chestnuts, just like oil prices, the cost of shale oil extraction is 60 US dollars. Once the oil price exceeds 60 US dollars, US shale oil traders are profitable, and the amount of extraction will increase dramatically. And once oil prices fall below $60, shale oil traders are unprofitable, and production volumes will be drastically reduced. Eventually, the oil price stuck around 60 US dollars, and 60 US dollars became the center of US crude oil prices. Looking at Figure 1 below, excluding the extreme effects of the pandemic, we can see that oil prices hovered below the $60 pivot point for most of the time.

Now that the logic is over, let's take a look at the pork industry data.

Figure 2 shows pig breeding profit data. It can be seen that profits from self-breeding and self-raising have also turned negative since June of this year, and the industry experienced extensive losses. Due to extensive losses in the industry, the number of new sows capable of breeding (pork production capacity) has stagnated. According to data from the Ministry of Agriculture, the number of breeding sows nationwide fell 0.5% month-on-month in July, ending 21 months of continuous growth. The month-on-month decline in breeding sows increased to 09% in August. Figure 5 below shows that according to estimates of the pig production cycle, the production delay period for commercial pigs corresponding to the peak of sow breeding can be kept for about 10 months, so the period when the pig cycle will bottom out will be in the second quarter of next year. The number of sows that can be raised from the first half of this year was still growing, and the supply of pork was still under pressure in the second half of this year.

Furthermore, frozen meat stocks accumulated in the early days when pork prices were high were not well consumed; currently frozen meat stocks are still at a relatively high level. Traders' accumulation of frozen meat basically began in January of this year. Since then, pork prices have continued to fall. Some traders have been waiting to increase their goods, hoping to reduce losses by waiting until large and fat pigs are cleared and consumption improves during the holiday season. However, looking at it now, the peak consumption season of Mid-Autumn Festival and National Day has not helped pork prices much, and pork prices are still sluggish. Therefore, once pork prices pick up later, this portion of frozen meat will definitely take the opportunity to be sold. At that time, the supply of pork will still be under great pressure.

As shown in Figure 6 below, pork stocks are not driven by demand but by supply. Judging from China's pork consumption data in the past few years, there has not been much increase. Under the influence of the three-year pig cycle and the epidemic, China's pork consumption is still declining. It has recovered in 2021 but is not expected to return to before the previous pig cycle, because there will always be a small number of people's consumption habits permanently changed. Even if pork is cheaper, they will still consider consuming chicken, duck, or fish.

The last picture is a brokerage agency rivalry $Muyuan Foods (002714.SZ)$ On the profit forecast chart, we can see that Muyuan Co., Ltd. predicts net profit of 17.9 billion yuan in 2022, a year-on-year increase of -19.2%, and the predicted PE is 16 times higher. Although I think pork prices have fluctuated quite a bit, and brokerage agencies' estimates for next year are not accurate, it can be used as a reference. Next year's pork stock performance pressure will still be high, and valuations will not decline but rise after profits fall.

In summary, considering that the stock price of cyclical stocks may be six months to a year ahead of the price of resource products. Well, it is reasonable that the pork industry bottomed out in the second quarter of next year until pork stock prices bottomed out in the fourth quarter of this year. However, the cycle bottomed out ≠ continued to rise sharply, and the outbreak of the cycle required intervention from external conditions to disrupt the balance between supply and demand in a short period of time. Looking at it now, I haven't seen such external conditions yet. However, once pork prices rise later, the pressure on pork supply is still very high.

Currently investing in pork stocks, I think it's still better than investing in other consumer stocks with lower valuations, such as Yili shares, which have surpassed expectations for dairy products after the interim report, Spring Airlines, an airline stock that is expected to resume demand after the epidemic is under control, etc., and even the main line lithium electricity and photovoltaics, I think it would be better than pork stocks.