Chinese Pig Farms Bring Home Bacon for Banks24 August 2008
CHINA - Zou Changkui, a 59-year-old pig farmer from the southern Chinese city of Longyan, is waiting for a call from Goldman Sachs that will change his life.
"I heard they have bought a lot of pig farms in Nanping, but they have not approached me yet," he said. But he has not lost hope. "If they want to buy my farm, I would say yes - providing we have a win-win agreement."
The US investment bank has sent ripples through the Chinese pork industry after reportedly spending between £150m and £200m this month on a series of hoggeries in Fujian, Jiangxi and Hunan, the heart of China's green belt.
It may be an unorthodox investment, but Goldman Sachs is not the only major bank on the hunt for hogs. Last year, Deutsche Bank launched the DWS Global Shennong Fund specifically to invest in agriculture.
Jiang Hua, the chief executive of Hongbo, an enormous Shanghai-based pig farm, said the German bank wanted to buy a 30 per cent stake for £30m. Deutsche Bank is reportedly spending a similar amount for a slice of Baodi, a Tianjin hoggery.
The foray by sharp-suited bankers into China's muddy countryside is a shrewd commodity play. Pork accounts for two-thirds of the meat consumption of China's 1.4bn people, and rising incomes are allowing people to eat more of it. China's pig industry, with 600m animals, is six times bigger than that of the US.
In February, pork prices were up 69 per cent and helped drive inflation to 8.7 per cent. Experts believe the market is so delicate that a fall of just 1.5 per cent in pig numbers could double prices.
The sudden riches have persuaded many of China's graduates to shun careers in technology or manufacturing and return from cities to the countryside.
Wang Chao, a 22-year-old from Jingyang, near Xi'an, said he had given up his college place to become a pig farmer. "I can sell one pig for 1,200 yuan or even 1,300 [more than £80]," he said. "The people I knew who graduated from my course were earning 1,500 a month."
Companies such as Agfeed, China's largest pig farmer, are declaring record profits. Two weeks ago, Agfeed, which is listed on the Nasdaq exchange, posted a 619 per cent rise in net profits for the second quarter of this year to £4.2m. "The Chinese population enjoys pork no matter what economic cycle the world is in," it noted dryly.
The company's strategy is to take advantage of an enormous restructuring of the pig farming industry, buying up small farms and merging them to form a huge, streamlined conglomerate. Traditionally, pigs were kept by every family and even now three-quarters of the country's swine are spread among micro-farms.
Li Songyan, the chairman of Agfeed, promised to buy at least four more farms in the second half of the year. "The hog shortages throughout China are presenting us with historical 'land-grabbing' growth opportunities," he said.
At least 600 medium-sized farms are potential acquisitions. Agfeed is determined to buy as many as possible, lifting its herd size from 400,000 to a hoped-for 1m. In April, the company snapped up 16 farms, paying from £500,000 to £3m each, depending on their size.
Agfeed said Goldman Sachs had noticed the opportunities being thrown up as the market restructures. "Our pig farming market is like the US in the 1960s or 1970s, with lots of small backyard mom-and-pop producers. There is a great opportunity to make money from scaling these operations up, but the entrance of these big foreign firms will mean more competition for us."
Even though the price of pork has soared, farmers like Zou are desperate to get out. More than three-quarters of China's pig industry is made up of tiny backyard farms. But many of them have been bankrupted by a series of natural disasters and are happy to sell. "This is a good time for foreign buyers. In the past two years, around 40 per cent of the small farms have exited," said Wang Hang, vice-chairman of New Hope Group.
Herds were hit last year by an epidemic of blue ear, a virus that attacks the lungs of a pig. Many farmers chose to slaughter their herds before the animals were fully grown to avoid being affected.
Snowstorms in January and February killed more than 4m pigs across 1,200 farms. Then the earthquake in Sichuan in May struck farmers again, destroying roads and preventing them from getting their produce to market. "A lot of farmers were wiped out last year, so there are opportunists now entering the market," said Mrs Cai, the owner of the Hengda pig farm in Jianyang. "The problem is that individual farmers find it difficult to make money."
The change in the structure of the market has worried the Communist party because it could force pork prices higher, feeding inflation. As Agfeed points out: "It is a seller's market. Wholesale buyers come to our farms daily and we sell to the highest bidder. If we refuse, the painful alternative is for a buyer to go into villages and collect pigs one by one from individual farmers."
There is also the issue of food security. The government worries that with such a large slice of the market, Western companies in effect control the supply of food and therefore its price.
Goldman Sachs controls Shuanghui and Yurun, China's two largest meat-processing companies. Wilmar International, the Singaporean company which has more than 50 per cent of China's cooking oil market, has let prices triple in the past year, provoking widespread complaints.
Back in Longyan, Zou said he is "ready to retire" and wants to be bought out. But he had a warning for the foreign companies hoping to make a fortune. "Fujian has a good climate for pigs, they survive best here. But you have to manage your staff closely, because they are mostly poorly educated farm boys with no ambition. That's why medium-sized farms, not big ones, are most profitable," he said.
|-||Some related news items on this story:
Goldman Sachs Invests in Chinese Pig Farming
New Chinese Pig Farming Joint Venture Formed
COFCO buys into leading US pork firm
AgFeed Buys Several Pig Farms in China
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