Since its mid-June peak, the Chinese market has fallen 42%, erasing more than $5 trillion in value as traders decided high stock values were unjustified by China's slowing economy.
The decision by the Chinese government to devalue its currency, starting on 11 August, was intended to bolster exports, but caused markets around the world to fall. And within China, some of the stocks worst hit have been those of meat producers.
A new report, ‘Slouching Tiger, Timid Dragon: Market Devaluation and China’s Losses in the Food Sector’ has been published this week by ChinaAg, a market research and analytical firm. “The poorest performing agricultural enterprises during the stock market decline were those engaged in meat (-47%) and animal feed (-42.4%) production,” the report states.
ChinaAg analysed 51 Chinese agricultural businesses that were publicly traded since markets began to fall in June. In total, five out of the six meat and animal feed companies analysed were traded in Shenzhen, the exchange most affected by the crisis. Conversely, food retailers performed most strongly during the crisis, averaging ‘only’ a 21% loss in value.
Compounding the problem for meat businesses has been the fact that at the time the stock market started its decline, the Chinese government announced more than 100,000 tonnes (t) of smuggled and out-of-date meat had been seized across 14 provinces in a crackdown on smuggling gangs, which damaged consumer confidence in the sector.
Opting to devalue the currency was a risky strategy given that, according to the report, “China is the world’s largest importer of agricultural goods, meaning the devaluation could hurt food processors which rely on cheap agricultural imports.”
Some areas of the meat industry, pork production in particular, are rapidly contracting in China. Last week, a report by Rabobank laid bare the decline in the Chinese hog and sow herd, which it dubbed “astonishing”. Chinese pork production is forecast to drop by 3.7mt (6.5%), to 53mt in 2015.
Over the past 18 months, China’s pork industry has experienced one of the largest culls on record. Rabobank laid out in its report ‘China’s Incredible Shrinking Hog Herd’ that the decline of nearly 110m head is equivalent to the US, Canadian and Mexican pork sectors all disappearing from global supply in a span of less than two years.
This tightening of pork supply may help stocks and prices for meat businesses recover. However, going forward, ChinaAg predicted it was unlikely that China’s agricultural enterprises would rebound quickly. “The uncertainty over the country’s stock market stability and volatile currency will continue to cast a shadow over any potential short term and medium term gains,” the report stated.