China's sliding hog prices weigh on soybean meal demand for March-June

China's soybean crushers are bracing for a further fall in soybean meal demand from the feed sector from March after domestic hog prices fell for the 11th consecutive week due to excessive slaughtering and a spike in pork inventories over December and January.

The hog price at slaughtering was down 17.5% month on month at Yuan 15.82/kg Feb. 1, and down 43% quarter on quarter, according to industry sources. The average hog price was Yuan 25/mt last October, before excessive restocking over October-November, an increase in slaughtering volumes and lower-than-expected demand during the Lunar New Year pressured prices lower.

The hog breeding margin recovered back above the breakeven level last May after a destocking that began in October 2021. Supply contraction and inflationary pressures spurred a rapid recovery in hog prices over May-October 2022, encouraging a restock of sow inventory as the breeding margin widened to Yuan 1,200/unit, industry sources said.

However, the extensive restocking led to excessive sow inventory and a higher slaughter volume. By end November 2022, the sow inventory had reached 44 million mt, 7% higher than normal, and in December the hog slaughtering volume was more than 30 million units, 9% higher year on year and 35% higher than the five-year average, according to industry sources.

However, the surge in pork supply coincided with a surge in COVID-19 cases in China in December-January that reduced domestic meat demand, causing hog prices to plummet.

The hog breeding margin was around minus Yuan 200/mt Feb. 1, market sources said.

"The sow inventory is still more than sufficient from the recovery of hog prices in May 2022, hence any massive restocking after May will lead to an inevitable price decline after the Lunar New Year because the reproduction capacity is still under surplus," a Chinese feed ingredients analyst said.

Soybean meal prices fall

China's soybean meal prices have followed the trajectory in hog prices, with one market source saying the spot soybean meal price stood at Yuan 4,590/mt Jan. 31, down 1.3% month on month and down 14.7% quarter on quarter.

"The decline in soybean meal prices was led by higher soybean crushing volumes and weaker feed demand after active slaughtering during Q4 2022," a Chinese soybean meal trader said. The soybean meal price may continue falling in February due to the higher crushing volumes, rising soybean meal inventories and negative hog breeding margins, the source added.

A Chinese oilseed researcher said the soybean meal price may fall below Yuan 4,000/mt in 2023.

Currently, feed sectors were procuring soybean meal on a hand-to-mouth basis, a Chinese trader said.

"As of Feb. 1, the inverse spread between March and April delivery months is Yuan 300/mt and the forward price for April delivery is still higher than the previous year," the trader said, adding: "Hence, feed millers are willing to skip demand for nearby months, resulting in lower demand for soybean meal."

A Chinese crusher source said: "The hog weight at slaughter dropped from 150 kg on average to 90 kg in January, indicating a falling interest for hog breeding, which would translate into a falling feed demand and soybean meal prices for forward months."

Close to breakeven level

The China gross crush margin has been positive since mid-January but may flip back to negative if soybean meal prices fall further.

Platts assessed China's gross crush margin at $1.78/mt Feb. 1 for March shipment, S&P Global Commodity Insights data showed. The replacement crush margin was Yuan 325/mt, market sources said.

Crushers said the soybean meal price might be supported in the near term, but the outlook for the second quarter was softer.

"The arrival volume of soybeans in March might be lower than initial projection at 6.5 million mt," a Chinese crusher said.

A Chinese broker said: "Only 5.5 million-6 million mt of soybeans might be imported in March."

Nonetheless, feed sector sources said demand will be low for March-June deliveries unless the hog price recovers, which hinges on a rebound in China's domestic meat consumption.