IN-DEPTH: Chinese Pork Industry Grapples With Financial Turmoil

Pigs stand in a barn at a pig farm in Jiangjiaqiao village, Hebei Province, China on May 8, 2019. Mark Schiefelbein/AP

The Chinese pig farming sector continues to struggle this year, as one of its major players, Fujian Aonong Biological Technology Group (Aonong Biotech) teeters on the edge of bankruptcy. The company’s troubles highlight broader challenges within the volatile industry, where many enterprises are grappling with substantial losses and an uncertain future.

Analysts attribute Aonong Biotech’s problems—and those of the Chinese pork industry in general—to the disruption of what is known as the “pork cycle”—the cyclical rise and fall of supply and prices in the pork sector.

On March 7, Aonong Biotech made the sobering announcement that the Xiangcheng District Court had accepted a restructuring application filed against its controlling shareholder, Aonong Investment Co., Ltd. The company faced the looming threat of insolvency should restructuring efforts fail.

The struggling company, once hailed as a rising star in the pig farming sector was founded in 2011, and initially focused on pig feed before expanding into pig farming operations. Its ascent was rapid, fueled by aggressive expansion strategies and financial leveraging following its listing in 2017. By 2022, its market value was nearly $3.48 billion, earning it the moniker “Pig King.”

However, the company’s fortunes took a sharp downturn as pork prices continued to decline and didn’t cycle back as expected, leading to operational challenges and staggering losses. Over three years, Aonong Biotech accumulated losses exceeding $765 million, with 2023 alone witnessing losses of approximately $417 million.

Adding to its woes, Aonong Biotech now faces the specter of delisting, with its 2023 performance forecast painting a bleak picture of expected net losses and negative shareholder assets. The company’s overdue debts to financial institutions have ballooned to approximately $236 million, while litigation and arbitration claims have further compounded its financial liabilities. 

With its latest asset-liability ratio soaring to 89.41 percent, combined with losses of at least $237 million in the fourth quarter of 2023, Aonong Biotech finds itself in dire straits, with its debt levels surpassing its assets.

Previous attempts by its controlling shareholder, Wuyou Lin, to stave off collapse through equity pledges and share sales have proven futile, with both Aonong Investment and Wuyou Lin’s holdings now frozen by judicial order.

Moreover, Aonong Biotech’s audited net assets for 2023 were negative, pushing it perilously close to delisting.

As pork prices show no signs of rebounding and debts continue to mount, Aonong Biotech’s struggle for survival underscores the precarious state of the Chinese pig farming industry.

African Swine Fever and the Rise of Megafarms

Since 2018, China’s pig farming industry has been reeling from the impacts of African swine fever (ASF), culminating in the bankruptcy of numerous small and medium-sized private pig farmers due to stringent epidemic prevention measures. Policies such as financial and tax subsidies primarily benefited large-scale pig farming operations, exacerbating the financial strain on smaller players.

As many small-scale pig farmers went out of business, the period from 2019 to 2020 witnessed a surge in large-scale pig farming. ASF and associated measures to contain the disease accelerated the trend toward megafarms.

Rural areas once dominated by family farms saw the rise of facilities like the 26-story pig farm operated by Hubei Zhongxin Kaiwei Modern Animal Husbandry on the outskirts of a rural village near the Yangtze River.

Inside the structure, which resembles an apartment building, pigs are raised in a high-tech environment complete with high-definition cameras and a command center where uniformed technicians monitor their charges.

A New York Times report last year described the megafarm: “Each floor operates like a self-contained farm for the different stages of a young pig’s life: an area for pregnant pigs, a room for farrowing piglets, spots for nursing and space for fattening the hogs.”

A worker poses outside a seven-story pig building at the Guangxi Yangxiang pig farm, in Guangxi province, China, on March 21, 2018. Megafarms including high-rise-like structures housing pigs have sprung up across China in recent years. Thomas Suen/Reuters

Widespread Losses, Rising Debt Across the Industry

Large-scale pig farming, however, has been driven by hefty financing, deepening debt risks across the sector. The building boom of huge pig farms caused the market to swing to oversupply, driving down prices again.

In 2023, pork prices did not rebound as expected but remained low throughout the year. Pork prices remained below the cost line for an extended period, causing pig farmers to suffer significant losses over the year.

As of Jan. 31, 2023, none of the 22 A-share listed pig enterprises disclosing performance forecasts for 2023 were genuinely profitable. Eighteen of the listed pig enterprises recorded net losses of between around $3.5 to $4 billion.

Even industry giants like Muyuan Foods, Wens Foodstuff Group, and New Hope Group weren’t immune, collectively facing expected losses exceeding 10 billion yuan ($1.4 billion).

Wens Foodstuffs reported a net loss of about $881 million in 2023, while Muyuan Foods had its first annual loss since 2009, with an expected loss of about $640 million. New Hope sold some assets but anticipated a loss of $646 million.

The deteriorating financial health of pig enterprises is evidenced by their escalating asset-liability ratios, aggravated by the broader downturn in China’s stock market over the past three years.

As of the third quarter of 2023, the combined debt of twenty listed pig enterprises, including industry giants, stood at approximately $63.389 billion, with an overall debt ratio of 66.7 percent. Fifteen of these enterprises witnessed an uptrend in their debt ratios, signaling growing financial strain.

Zhengbang Group, hailed as the “Pig King” of Jiangxi province, succumbed to mounting pressure, reporting annual losses of almost 19 billion yuan ($2.64 billion) for 2021, and became the first major casualty of this pork cycle. Following a bankruptcy reorganization and subsequent takeover by a consortium led by major Chinese pig feed producer Twins Group, it narrowly avoided delisting, underscoring the severity of the industry’s predicament.

Tightening cash flows further compounded the challenges for pig enterprises, exacerbating their struggle to secure financing amid mounting debts and losses.

The unfolding crisis has shattered hopes of a reversal in the traditional pork cycle, as pork prices show no signs of recovery. Typically characterized by cyclical fluctuations, the current pork price has remained low and defied expectations.

The surge in pig production post-African swine fever outbreak in 2019 led to overcapacity. According to China’s National Bureau of Statistics, China’s total pork production in 2023 reached 57.94 million tons, the highest level since 2015. The high pork production, coupled with a wave of restaurant closures due to the economic downturn and shifting consumer behaviors, led to a surplus in pork production, exacerbating the sector’s woes.

Moreover, the pandemic’s impact, which included significant loss of life, meant fewer mouths to feed and subsequent consumption dividends, further complicating supply-demand dynamics within the pork industry.

‘A Turning Point Seems Distant’

Recent data from China’s Ministry of Agriculture and Rural Affairs shows that China’s breeding sow inventory declined notably by the end of January 2024, dropping to 40.67 million and marking the largest restocking event in this cycle.

While the decline initially fueled hopes of a reversal, recent policy adjustments tempered these expectations.

On March 1, the ministry announced a downward adjustment in the national target for the normal inventory of breeding sows, from 41 million to 39 million, signaling that production capacity remains high despite the inventory reduction.

Compounding concerns for pig enterprises and investors are developments in pork imports. China is set to import pork from 21 countries in 2024, with an anticipated influx of 21 million pigs.

Estimates from the Russian National Pork Industry Enterprise Alliance suggest a potential surge in pork exports to China, with projections reaching 25,000 tons in 2024 and an annual increase to 200,000 tons within the next two to three years.

Meanwhile, U.S. pork exports to China have witnessed a significant uptick, with pork exports to China up 69 percent year on year in the seventh week of 2024.

As cash flow pressures mount on pig enterprises amid stagnant consumer demand, the prospect of an extended pork cycle poses daunting survival challenges for businesses burdened with high leverage and operational costs.

Recently, an industry insider told current affairs publication Time Weekly that many enterprises have been relying on past earnings for their survival. “Many pig companies rely on the money they earned in the past to survive until now. They have experienced strong winds and waves. If they can’t hold on, they will quit,” the South China insider said.

Mike Sun, a North American investment adviser and China expert, told The Epoch Times on March 8 that “after the original pork cycle was broken, the appearance of a turning point seems distant. If pig enterprises face substantial losses and their mounting liabilities exceed assets, they may be forced to declare bankruptcy and undergo restructuring.”

Mr. Sun predicts that navigating these challenges will prove difficult for both pig enterprises and investors alike, underscoring the uncertain outlook for the sector in 2024.