Summary of Key Points
The core message of this news is that the costs in the pig farming industry have reached a level where they are unlikely to decrease further. This will accelerate the exit of companies that cannot sustain their losses from the market (resulting in capacity reduction), ultimately leading to an increase in pig prices and making the signals for a reversal in the pig cycle more apparent.
In the past few years, the reduction in pig farming costs was due to three factors: the decline in the impact of diseases, lower feed prices, and improved breeding efficiency. However, these advantages are now nearly exhausted. Even Muruan Co., Ltd., the company with the lowest costs and highest efficiency in the industry, is facing significant challenges in further cost reduction, as there is very little room left and the process is becoming increasingly difficult. The inability to lower costs means that if pig prices remain low, companies will have to rely on spending money to stay in business. Those that cannot afford this will eventually close down, leading to a decrease in supply and a subsequent rise in prices. Additionally, the El Niño phenomenon could cause feed prices to rise, further increasing the financial pressure on companies and accelerating capacity reduction. In the long term, Muruan is transitioning from a company focused on pig farming to one involved in slaughtering and meat processing, which could potentially elevate its stock valuation as it moves from a cyclical stock to a food-related stock.
Detailed Analysis
1. Why can't industry costs be reduced anymore? The advantages of cost reduction are gone
The continuous decline in pig farming costs over the past few years was driven by three main factors:
- Decline in disease impact: Diseases such as African swine fever once increased the risks and costs of pig farming; as control measures improved, costs decreased accordingly.
- Lower feed prices: The prices of feed ingredients like corn and soybean meal have fallen, reducing the feed costs, which account for 60% of total production costs.
- Improved breeding efficiency: For example, sows are now producing more piglets per year (higher PSY rates), and fattening pigs are growing faster, resulting in lower per-unit costs.
However, these factors are no longer effective:
- The impact of diseases has stabilized, and there is no additional potential for cost reduction.
- Feed prices have already dropped to nearly their lowest levels, with little room for further decline.
- Breeding efficiency (e.g., PSY rates) has reached global advanced levels, and further improvements require significant investment, such as in breeding and management improvements, which can increase costs instead.
In short, the potential for cost reduction has been largely exhausted, making it difficult to lower costs further.
2. Muruan Co., Ltd. as a benchmark for industry costs: If it can't reduce costs, it indicates difficulties for the entire industry
Muruan is considered the leader in the industry for several reasons:
- Largest scale: It sold 38.61 million pigs in the first half of 2026, accounting for 10% of the national total.
- Lowest costs: Its costs are 1.5 yuan per kilogram lower than the industry average, reflecting its high efficiency.
Muruan's cost reduction efforts reflect the industry's maximum potential:
- In 2022, Muruan aimed to reduce costs by another 5 yuan per kilogram (600 yuan for a 120-kilogram pig), bringing the target cost to 10.5 yuan per kilogram.
- Its current average cost is 11.5 yuan per kilogram, with some of its best facilities achieving 10.5 yuan per kilogram, leaving only a small margin for further reduction.
- The speed of cost reduction has also slowed down; what used to take one year may now take three years or longer, especially as costs approach their lowest levels.
If even the best-performing companies are struggling to reduce costs, it is even more challenging for the rest of the industry, indicating that the overall cost level is stabilizing.
3. Inability to reduce costs is actually beneficial for the pig cycle? Because unsustainable losses will lead to capacity reduction
This may seem counterintuitive, but it is important to understand:
- If costs could have continued to decline, companies could have used them to offset losses and avoid market exit, preventing a decrease in supply and holding back price increases.
- With costs now stable, low pig prices result in severe financial losses for companies, as they do not have enough money to cover feed and wages (cash flow deficits), leading to closures.
The current situation is as follows:
- Listed pig farming companies have experienced cash flow deficits for two consecutive quarters, and it is expected that this will continue in the third quarter.
- The purchase of piglets has become highly profitable, but farmers are hesitant to increase their inventory, indicating pessimism about the market in the next six months.
- If cash flow deficits persist for three quarters, companies will be forced to exit the market (capacity reduction).
Therefore, the inability to reduce costs will actually accelerate capacity reduction, paving the way for price increases.
4. El Niño will exacerbate the situation by raising feed prices
El Niño is an extreme weather phenomenon that affects global agricultural production:
- It will cause drought and high temperatures in the corn and soybean-producing regions of the United States and Brazil, leading to reduced crop yields.
- Corn and soybean meal account for 85% of feed costs, which in turn account for 60% of production costs. Thus, rising feed prices will directly increase pig farming costs.
- Higher costs will lead to greater losses for companies, accelerating their exit from the market and further capacity reduction.
The stronger the El Niño phenomenon, the more favorable it is for a reversal in the pig cycle, as it will make it even harder for companies to sustain their operations.
5. Circumstances that could undermine this logic (signals to watch out for)
Our optimistic view of a pig cycle reversal could change if either of the following occurs:
- Sustained price increases: If pig prices rise rapidly and for an extended period, companies' cash flow pressures will ease, slowing down capacity reduction. Attention should also be paid to the widening gap between the prices of larger and smaller pigs; if larger pigs become more valuable, farmers may keep piglets larger before selling them, delaying the supply and delaying the start of the cycle.
- Sudden improvement in breeding efficiency: If new breeding technologies are introduced, increasing sow productivity or fattening pig growth rates, costs could decrease, allowing companies to continue to withstand losses and slowing down capacity reduction.
Additionally, Muruan's transformation is a medium to long-term development opportunity. Its slaughtering and meat processing business accounted for 37% of its revenue in the first half of 2026. If this transformation is successful, Muruan could transition from a cyclical stock dependent on pig prices to a food-related stock with higher valuation, but this will take several years.
Conclusion
The current optimism about the pig cycle is based on the fact that costs are no longer declining. Companies that cannot sustain their losses will exit the market, reducing supply and driving up prices. In the short term, the speed of capacity reduction depends on whether pig prices remain low and the intensity of El Niño. In the long term, Muruan's transformation could change its valuation. However, investments in the pig farming industry should be approached with caution due to the high volatility of cyclical stocks.