(Bloomberg) -- Chinese farmers are keeping the fewest pigs for breeding since 2020, offering hopes that the industry is on the cusp of sustained profitability after years of losses.

Key indicators point to the market having bottomed. Foremost was the drop in the sow herd to below 40 million head, a four-year low, reported by the government last week. The number of sows determines the number of piglets and ultimately the amount of meat on the shelves. As a consequence, pig prices have jumped more than 10% in the last two months, while margins have been positive since mid-March.

The so-called pork cycle in China, where prices are driven by mismatches in supply and demand, has implications beyond farm incomes. Analysts look to the cycle for clues on inflation because the nation’s favorite meat is an important element in the basket of goods used to measure price changes. Weakness in livestock markets has contributed to the deflationary pressures that have weighed on consumer spending in recent months, posing risks to Beijing’s target for economic growth.  

Still, the moves are insufficient to herald a major turning point, according to Zhu Zengyong, a researcher at the Chinese Academy of Agricultural Sciences. Rather, the market has entered “an upward cycle on a smaller scale,” he said.

“The fall in the sow herd, though continuous, is still not enough to restart a major new pork cycle,” said Zhu. “In addition, demand has been weak since the second half of last year due to the macro economic environment.”

China’s pork cycle is just another variant of the booms and busts that characterize commodities markets and typically lasts three or four years. The current one began with a steep drop in prices in 2021 after farmers expanded their herds to capture better margins.  

Fewer pigs now mean prices have once again turned higher, which is starting to entice speculators into the market, according to Cofco Futures Co. Hog slaughters are expected to fall further, by more than 5% in both the second and third quarters compared to the previous year, the brokerage said in a note this week.

Green Shoots

The central bank’s target of 3% annual growth in the consumer price index has long looked out of reach. CPI grew just 0.1% in March, while prices actually fell from October through January, so any green shoots of recovery in food markets will be welcome, even if the improvement is driven by supply rather than demand. 

While sentiment has undoubtedly improved, there are still obstacles to overcome if the rebound in the hog industry is to be maintained. 

China’s sluggish economy could cap any further gains in price if cash-strapped households continue to penny-pinch. Some farmers may be too quick to restock their herds. 

Others are holding back pigs that are already ready for slaughter, fattening them further for bigger profits, the agriculture ministry said last week. That’s likely to swell supply in coming weeks and months.

And the structure of the market has changed in recent years. Previously, steep losses would wipe out smallholders, which in turn would deepen supply deficits. But consolidation has reduced the number of small farms, leaving more capacity in the hands of larger companies that are better able to ride out unprofitable periods.

“With production more concentrated with big corporate players, continuous losses will lead to some output cuts, but they won’t be as dramatic,” said Zhu.   

On the Wire

A wide swath of consumer-related data reinforce the view China’s recovery is more uneven than recent headline GDP figures might suggest.

China’s private oil refiners could seek to buy more cargoes whose origin has been obscured as they prepare for fresh US sanctions on Iranian exports, ensuring crude continues to flow to the world’s top importer.

Gold’s record-setting rally this year has puzzled market watchers as bullion has roared higher despite headwinds that should have held it back. With prices sagging this week, the explanation may lie in China.

This was supposed to be the year that Vietnam reaped the benefits from one of its largest natural gas discoveries. 

Russia’s focus on boosting natural gas exports to China is proving less lucrative for the nation than its former reliance on westbound deliveries to European markets.

The Week’s Diary

(All times Beijing unless noted.)

Wednesday, April 24:

  • US Secretary of State Antony Blinken visits China
  • CCTD’s weekly online briefing on Chinese coal, 15:00
  • SMM aluminum conference in Chongqing, day 1
  • SMM Copper Industry Conference and Expo in Hangzhou, day 3
  • EARNINGS: CGN Power, Trina Solar, China Coal, HKEX

Thursday, April 25:

  • US Secretary of State Antony Blinken visits China
  • Beijing Auto Show, through May 4
  • SMM aluminum conference in Chongqing, day 2
  • EARNINGS: Cnooc, China Oilfield, TCL Zhonghuan, Chalco, Jiangxi Copper

Friday, April 26:

  • US Secretary of State Antony Blinken visits China
  • China weekly iron ore port stockpiles
  • Shanghai exchange weekly commodities inventory, ~15:30
  • EARNINGS: Baosteel, Hesteel, GEM, Anhui Conch, Shenhua, Goldwind

Saturday, April 27

  • China industrial profits for March, 09:30

Sunday, April 28

  • China Industrial Silicon Supply Chain conference in Xiamen, Fujian, day 1
  • EARNINGS: Sinopec, Ming Yang, Tongling Metals

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