Summary in One Sentence
Over the past few decades, domestic livestock farming companies have been aggressively expanding their production of pigs and chickens, competing on cost and capacity to capture the market. However, in the past two years, an increasing number of leading companies have been unable to withstand the extreme fluctuations in pig and chicken prices and have begun to expand into the downstream food processing sectors. They are investing in slaughter, meat processing, ready-made dishes, and other value-added products in an attempt to stabilize their profits by getting closer to consumers. Nevertheless, the barriers to entering the downstream food industry are much higher than initially anticipated, and most of the new entrants are still in the exploratory phase, with the entire industry far from achieving a successful transformation.
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Detailed Analysis
1. Livestock Farmers Moving Downstream Out of Fear of Market Fluctuations
The livestock farming industry is inherently reactive: when pig prices rise this year, farmers want to increase production, but it takes four months for sows to conceive and six months to raise pigs to market readiness. By the time the new batch of pigs hits the market, supply often exceeds demand, causing prices to plummet. In the past, with a smaller industry scale, a few years of losses could be tolerated until the next market upswing. Now, leading companies, with millions of pigs in production, face significant losses when prices drop, as the value of their inventory is reevaluated based on market prices. Even if they reduce costs to the lowest level in the industry, they cannot control prices, which are determined by supply and demand. This year, the industry's divergence is evident: Yisheng, a company that sells chicken chicks, benefited from a shortage of breeding stock due to overseas avian flu, earning over 300 million yuan in the first half of the year; however, Minhe, which focuses on chicken farming and slaughter, continued to lose money due to poor sales of finished chicken products. The stark differences in performance across different parts of the same supply chain have led companies to seek new, less volatile business models.
2. Different Paths for Different Companies Moving Downstream
Many companies claim to be entering the downstream food processing sector, but their approaches vary greatly:
- Entry Level: Building their own slaughterhouses to sell fresh meat. This simply involves cutting up pigs and chickens into different parts for sale, still relying on scale and efficiency. For example, Muyuan earned over 22 billion yuan from slaughter sales in the first half of the year, mainly from fresh and frozen meat products, without delving into deeper processing.
- Intermediate Level: Supplying processed products to large catering customers, such as KFC and Tasting. This requires the ability to customize products and ensure consistent quality, which is a higher level of expertise. Shengnong has succeeded in this area, with half of its revenue coming from meat products.
- Advanced Level: Directly selling ready-made food to consumers through own brands and channels. This involves competing with established food brands and requires marketing and consumer understanding. For instance, although Yisheng's chicken chick business is doing well, Wen's 99% of its revenue still comes from selling live pigs and chickens, with no involvement in downstream processing.
3. The Downstream Food Business Is More Challenging
Many companies underestimate the difficulties of entering the downstream food industry:
- Lower Costs Do Not Equal Higher Profits: Even if farmers have cheaper raw materials, the average operating rate of slaughterhouses is only 33%, and there is excess supply. Many companies struggle to sell their products at competitive prices. Xiantan's processed food business has a 4.87% gross margin, barely covering costs. Minhe's online sales have a higher margin, but its wholesale business to distributors results in losses.
- Unique Challenges: Successful companies like Shengnong have built a customer base and product development capabilities over years, which new entrants cannot easily replicate.
4. The Transformation Affects Everyone
This shift in the industry will impact consumers:
- Better Quality and Prices: More cost-effective meat products will become available, with clearer supply chains and potentially lower prices.
- Stabilized Prices: Companies will be less likely to panic and sell products at low prices, helping to stabilize prices.
- New Product Varieties: New, affordable products like low-fat chicken breasts and ready-made dishes will emerge.
5. The Future of the Industry
The transformation of the livestock farming industry is not just about the companies themselves; it will also change what consumers buy. Consumers will have access to higher-quality, more affordable meat products, and price fluctuations will be less extreme. However, only a few companies will succeed in the downstream food market, and most will still struggle for years. The industry's transformation is far from complete.