CITIC SEC: The Ministry of Agriculture has introduced a scheme for regulating the production capacity of live pigs. The production capacity of live pigs is expected to continue to decrease.

CITIC SEC released a research report stating that the Ministry of Agriculture and Rural Affairs recently issued the "Implementation Plan for Adjusting Pig Production Capacity (Revised in 2024)", which lowered the standard for the number of sows, optimized the relevant fluctuation range, guided the industry to eliminate excess production capacity, added relevant content to guide large-scale pig enterprises, and increased subsidy standards for loss-making enterprises. In the short term, it is expected that the industry will still face an oversupply situation, with a trend of capacity elimination, and it is recommended to continue allocating resources to the sector at its current position. CITIC SEC's main points are as follows: Event: The Ministry of Agriculture and Rural Affairs issued the "Implementation Plan for Adjusting Pig Production Capacity (Revised in 2024)". The main points are as follows: the normal number of sows has been adjusted from 41 million to 39 million. The green zone (normal production capacity fluctuation) ranges from 92% to 105% of the normal number (35.88-40.95 million), the yellow zone (significant production capacity fluctuation) ranges from 85% to 92% (33.15-35.88 million) or 105% to 110% (40.95-42.9 million), and the red zone (excessive production capacity fluctuation) is below 85% or above 110% of the normal number. The Ministry of Agriculture and Rural Affairs will implement intensified control measures once the industry enters the yellow/red zone. Our comments on this are as follows: Lowering the normal number of sows and expanding the lower fluctuation range to guide the continued reduction of production capacity in the industry. Compared to the temporary plan in 2021, this plan lowers the number of sows by 200 million to 39 million, which we believe is mainly based on factors such as the improved efficiency of sows in recent years. At the same time, the green zone range in this plan is 92% to 105% (compared to 95% to 105% in the 2021 version), and the lower yellow zone is 85-92% (compared to 90-95% in the 2021 version), both with some downward adjustments. According to data from the Ministry of Agriculture and Rural Affairs, there were 40.67 million sows in stock at the end of January 2024, close to the upper limit of the green zone (40.95 million). If 4.1% of them are eliminated, it will reach the normal number. If 11.8% are eliminated, it will enter the lower yellow zone. We believe that the current official determination of sows is relatively sufficient, which will further guide the industry, especially high-cost entities, to eliminate production capacity. Even when the industry may achieve profitability, companies will be more cautious about increasing capacity. In addition, this plan further tightens the subsidy standards for companies that have experienced continuous losses. Compared to the 2021 plan, the temporary assistance subsidy in this plan for companies that have experienced losses for three consecutive months has increased from 100 yuan to 200 yuan. Clarifying the implementation department of the plan and adding content to guide the adjustment of production capacity for large pig enterprises. Compared to the 2021 plan, the implementation department for adjusting the number of sows at pig production capacity control bases has been changed from the provincial, city, and county people's governments to the relevant local agricultural and rural departments. In addition, this plan adds the statement "The Ministry of Agriculture and Rural Affairs guides large-scale pig farming enterprises to rationally increase/reduce production capacity", mainly based on the gradual increase in the proportion of large-scale farming enterprises in recent years (according to announcements from various companies, we estimate that the proportion of pig farms accounted for by 17 listed companies has increased from 14% in 2021 to 22%), but there are no mandatory measures by the relevant departments. Instead, adjustments are made through enhanced monitoring, warning, guidance, and supervision to achieve production capacity adjustments. It is expected that the trend of production capacity elimination in the industry will continue, and it is recommended to position oneself in the sector on the left. The temporary plan in September 2021 set the reasonable production capacity at 41 million sows (with a normal fluctuation range of 38.95-43.05 million heads). By April 2022, the bottom of the production capacity was around 41.77 million, but in the second half of 2022, pig prices experienced a significant rebound (according to data from Boya Hexun, the lowest price in the first half of 2022 was 11.64 yuan/kg, and the highest price in the second half was 28.49 yuan/kg, a rise of 144.8%). Currently, under more than a year of consecutive losses in the industry, the cumulative elimination of production capacity is higher than the same period in 2022, and the industry is still in a channel of eliminating production capacity. Industry debts and financial pressures are more severe than in 2022, epidemic prevention and control is more complex, and industry confidence is lower. We believe that production capacity will continue to be eliminated in the future, and the cyclical reversal is still possible. Currently, the average market value of the sector has dropped to 1,000-2,000 yuan in 2025, and the valuation is relatively low. We continue to recommend the hog farming sector. Risk factors: Pig prices do not meet expectations; production capacity does not meet expectations; consumption does not meet expectations; changes in pig industry policies; extreme natural disasters; large-scale outbreaks of animal diseases; significant fluctuations in grain and feed raw material prices; food safety issues.