Zhongtong Caijing APP learned that Guosheng Securities released a research report stating that compared with the stable demand trend for the year, there was an abnormal demand increase in the second and third quarters of the year, which may be related to the growth of piglet breeding forces in recent years. Since June, the national average price of pigs has been increasing, but there has not been a relatively aggressive operation of piglet breeding. Considering the rhythm of sow change and annual consumption elasticity in 2023, the reduction in supply is still continuing, and seasonal upward consumption is imminent. The target focuses on Muyuan Foods (002714.SZ), Wens Foodstuff Group (300498.SZ), Tangrenshen Group(002567.SZ), Tecon Biology Co.Ltd (002100.SZ), Hunan New Wellful(600975.SH), Shenzhen Kingkey Smart Agriculture Times (000048.SZ), Zhejiang Huatong Meat Products(002840.SZ), Leshan Giantstar Farming&Husbandry Corporation(603477.SH), etc.

Zhongsheng Securities' main points are as follows:

One of the elasticities: deviation between production capacity and efficiency

Guosheng Securities stated that the change in production capacity can roughly define the length of the period reversal from a time dimension, but as the single variable, breeding sows still have uncertainty factors from breeding to commodity pig breeding, which leads to a deviation between production capacity and final supply. Empirical data shows that the acceleration time point of breeding sows on a month-on-month basis has a certain corresponding relationship with the peak value of pig prices 10 months later, and it often corresponds to the extreme point of the same period adjustment in supply on a year-on-year basis.

Guosheng Securities believes that in the process of increasing the slope of production capacity adjustment, there will often be an amplification of efficiency data such as breeding rate, which may be an external cause, such as disease and weather; or an internal cause, such as emotions. In this round of breeding sow adjustment, the time point for accelerated consumption is November 2023, December 2023, and January 2024, and the month-on-month decline in breeding sow is 1-2%, which can further calculate the time point when extreme value may appear in September-November 2024.

One of the elasticities: uneven demand and supply mismatch

The demand for pork is not evenly distributed throughout the year. The proportion of average pork production in each quarter from 2010 to 2023 was 28%, 21%, 22%, and 29%, and the average profit was 339 yuan/head, 190 yuan/head, 379 yuan/head, 424 yuan/head, reflecting that consumption is most vigorous in the fourth quarter, and the average pork production and profitability are the highest; consumption is weakest in the second quarter, and the average pork production and profitability are the lowest, which also confirms that historically, low prices often appear from February to May after the Spring Festival, and although the peak of pork prices is unstable, it often appears in the months of August to October.

The imbalance of demand will cause the supply curve to have an offset or superposition effect when it falls into the corresponding period, which will further smooth or increase the elasticity of pork prices. If the pig cycle is divided by year, the significant monthly price difference can still be seen in the chaotic trend. The average monthly price difference from 2003 to 2023 is 6.9 yuan/kg, and excluding the three years of 2019, 2021, and 2022 with large price differences (all greater than 10 yuan/kg), the average is still 4.6 yuan/kg. Further analysis reveals that the price Difference relationship will be amplified in an upward cycle, while in a downward cycle, the price difference relationship will decrease but still exist.

One of the elasticities: speculative demand and breeding sentiment

As an empirical conclusion, the seasonal nature of demand during the year will affect production decision making on the production side, in an attempt to optimize the timing of releasing pigs for slaughter during the year. Guosheng Securities pointed out that compared with the stable demand trend for the year, there was an abnormal demand increase in the second and third quarters of the year, which may be related to the growth of piglet breeding forces in recent years.

The secondary fatting has a dual attribute of demand and supply. From the supply side, piglet breeding reduces the pig supply of the base period and increases the pig supply of the far period. However, it should be emphasized that the increase in piglet breeding according to the proportion constraint; from the demand side, the pigs purchased by the secondary fattening households for the sake of future price increase have a speculative nature. Its price is determined by the expectations of the secondary fattening households for pig prices, and then pig products have financial attributes and price volatility will be greater. Based on the difference between body weight and standard price, the current secondary fattening volume is relatively limited.

After 2022, the overall weight level of the industry has increased. As of the second week of June 2024, the average weight of pigs slaughtered in 16 provinces and cities was 91.79 kg, an increase of 1.1% year-on-year, which is 1.1% higher than the average. There is still a large gap compared with the high level of 21 and 22 years, and the weight has not yet reversed the supply. In addition, since June, the standard price difference has been around 0.1 yuan/kg, which is at a seasonal low in recent years, and there is no obvious speculative demand for the standard pig in the market, which further reflects that the level of piglet breeding is lower than in previous years.

Risk warning: pig price volatility risk, disease risk, consumption demand risk, etc.