Hog price rally likely in Aug-Sep supported by strengthening structural support

The current domestic hog market presents a clear pattern of structural differentiation on the supply side, with the continued contraction of heavy-weight hog resources laying a solid foundation for a phased recovery in hog prices.

According to data from Mysteel, the spread between standard-weight and heavy-weight hogs has been widening persistently since late July, with the spread expanding from Yuan -0.95/kg on July 21 to Yuan -0.98/kg on August 17, while touching a low of Yuan -1.07/kg during the period. The continued deepening of this negative spread indicates that the premium for heavy-weight pigs is rising steadily, reflecting an intensifying shortage of heavy-weight hogs in the market.

The core trigger for this contraction in heavy hog resources is the persistent disruption caused by African swine fever outbreaks in the main southern production areas, which has elevated farming risks for small and medium-sized households, prompted the concentrated reduction and orderly liquidation of large hogs on farms, and significantly reduced the available heavy-weight hogs in the market. This structural shortage in heavy-hog supply has consistently widened the standard-to-heavy spread, exerting strong upward pull on spot prices of standard-weight pigs and serving as the key bullish support on the supply side in the short term.

From the perspective of slaughter weight, supply-side flexibility has further tightened. Data from Mysteel's sampled farming enterprises show that slaughter weights in major domestic production areas have been on a sustained downward trend. At present, the slaughter weights of leading farming groups are generally low, with limited reserves of marketable heavy hogs available on farms.

As temperatures gradually decline nationwide in the coming period after summer, the constraints on production imposed by high temperatures will ease, creating more favorable conditions for hog weight gain and retention. Farming groups will have ample room to manage supply by reducing slaughter volumes and controlling releases, providing a key supply-side lever for a staged price rally at the end of August.

In terms of hog marketing pace and regional transmission patterns, the pace of hog marketing in the production areas in northern China was generally faster in early August, with market inventories being cleared rapidly.

Looking at historical patterns, price up-cycles in the domestic hog market typically begin in the northern market, which then stabilizes and pushes the upward momentum gradually to the rest of the country. This well-established regional transmission path provides a solid rhythmic foundation for the current price move.

After nearly one and a half months of low-level consolidation, the spot hog market has built a strong support base at the bottom, with broad market consensus firmly established and pessimistic sentiment fully cleared.

Mysteel's data show that spot hog prices in many regions bottomed out in early August, closely aligning with the market-recognized floor of around Yuan 10.23/kg. Afterwards, the hog spot prices began a steady recovery. Hog prices across regions have rebounded markedly, and the core consensus that "the bottom is in and there is no room for a deep drop" has continued to strengthen, providing emotional support for the subsequent price rally.

On the supply side, the industry's overall marketing pace remains normal, but leading farming groups face significant pressure to meet their annual marketing targets, with some phased marketing rush, implying potential flexibility for additional supply later. At the same time, the second-fattening hog inventory that entered the market at the end of June has not yet been fully cleared.

If hog prices rise sharply later on, these existing hogs could be released in concentration, creating a direct offset to price gains. However, the market operates on a dynamic cyclical basis. That is, after the older batch of second-fattening hogs is sold to realize profits, the newly initiated upward move is likely to attract fresh second-fattening capital to step in, continuously influencing short-term inventory structures.

On the demand side, the market is currently in the late stage of the traditional consumption off-season, showing a state of "weak recovery and pending pick-up". Data from Mysteel's sample of 135 slaughtering enterprises show that the slaughtering operating rate stood at 35.08% on August 17, up slightly from the low of 33.64% at the end of July, but still at historically low levels. Daily slaughter volume increased from 273,000 head to 283,000 head, a modest month-on-month improvement that confirms marginal warming in end-market consumption, though the increase in actual demand is still insufficient, with overall catering and household consumption remaining relatively weak.

Looking ahead, a key consumption inflection point is expected from late August to early September, as school reopening preparations and other concentrated consumption demands are gradually released. The end-market pork consumption is set to see seasonal month-on-month improvement, providing solid demand-side support for hog price increases.

Considering the overall hog production structure, slaughter pace, seasonal consumption patterns, and market sentiment, domestic hog prices are expected to maintain an upward, volatile trend from mid-to-late August through early September.

The rebound height in this round is likely to surpass the rally seen at the end of June, with a core target range of Yuan 11.5-12/kg. Under favorable market sentiment and improved supply-demand alignment, prices have the potential to challenge the Yuan 12/kg level.

However, it must be clearly stated that this round of hog price movement is a seasonal corrective rebound, not a cyclical reversal. The extent and sustainability of the price increase face multiple hard constraints.

First, slaughtering enterprises have limited capacity to absorb high-priced hog supplies. With the current industry operating rate at only about 35%, a rapid rise in hog prices will prompt slaughterers to counter upward price pressure through reduced purchasing and by releasing previously accumulated frozen inventory, directly capping the upside.

Second, the second-fattening hog inventory retained from the end of June will be released in concentration after prices rise, creating phased supply pressure that will curb gains.

Third, leading farming groups face heavy annual delivery obligations. Even if they temporarily reduce supply to support prices in the short term, the long-term pressure to release supply remains, making it difficult to sustain a continuous sharp rally. This upward move will most likely exhibit a "sharp rise and quick adjustment" spike-top pattern.

Taking a longer-term view, the underlying supply-demand pressures in the hog market have not dissipated, and the long-term weakness remains intact. On the supply side, continuous improvements in industry productivity are offsetting the effects of capacity reduction. At present, the national sow herd has approached the Ministry of Agriculture's reasonable reserve target, but the significant increase in PSY (pigs per sow per year) means that the same sow base can produce substantially more marketable pigs. The actual effect of capacity reduction has been largely neutralized by productivity gains, leaving the industry's overall supply base still ample.