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Reading the Swine Print

For the past decade, China’s pig companies scaled up rapidly by contracting small farmers to free up capital and offset market risks. But when pork prices plummeted, the business model left farmers holding the feed bag

By Wang Yu Updated Jan.1

Debt-laden Zhengbang Technology, one of China’s leading pig producers, is undergoing a court-ordered restructuring of its subsidiary Zhengbang Breeding after one of its contracted farmers filed a complaint for an unreturned deposit, the company revealed in its Q3 report on October 31, 2022.  

Wen Jie, a farmer who signed a contract in December 2021 with Zhengbang Breeding, failed to get back his 5 million yuan (US$689,500) deposit for piglets after his contract expired in June 2022 as agreed. On October 26, Wen filed with a court in Nanchang, Jiangxi Province. The company is in the process of debt restructuring, the report said. 

If an agreement is reached, the Shenzhen-listed company has a good chance of surviving. Otherwise, Zhengbang faces bankruptcy and delisting from the stock market, the China Securities Regulatory Commission warned.  

Zhengbang reported losses of 7.6 billion yuan (US$1.05b) in the first three quarters of 2022, while its revenue dropped by over 66 percent year-on-year, amid plunging pork prices starting from 2021 until the second quarter of 2022. Struggling on the brink of insolvency, the company stopped supplying feed to contracted farmers. This led to cases of pig cannibalism, as shown in a number of graphic videos posted on Douyin (China’s TikTok). The company blamed a feed logistics issue that has since been resolved.  

According to its financial statements, low pork prices and the Covid-19 pandemic had further strained the company, which had been offloading assets to alleviate financial pressure since early 2022.  

In late 2020 when pork prices were high, the company vowed to join the Fortune 500 list within three years.  

Pork prices have increased again since April 2022 and pig companies have seen profits rebound. But the pork price plunge over the previous 16 months has taken a huge bite from the third-quarter profits of nearly all leading pig companies in China.  

Zhengbang is not the only company facing lawsuits from contracted farmers. Compounded by market volatility, these disputes have brought the once muchtouted business model of sub-contracted farmers increasingly under question. 

Trotting the Cycle 
On September 19, 2022, China’s National Development and Reform Commission announced that about 200,000 tons of official pork reserves would be released to curb prices, a record high for a single month.  

The rise and fall of Zhengbang and the government’s move reveals how imbalances in supply and demand can drastically affect pork prices and Chinese consumers’ dining tables.  

When demand is high, pig farmers rush to raise more pigs, which drags prices down. Farmers then cut production, pushing prices high again. Typically, this cycle – known in the industry as the “pork cycle” – occurs over three to four years.  

In China, as pork consumption outweighs that of beef, lamb and poultry combined, the pork price is a major indicator of inflation. For years, most pig farmers in China were individuals who lacked access to market information and the ability to adjust in time, which experts and the government pointed to as the primary reason for instability in the industry.  

In the early 2000s, pig production companies began contracting with individual farmers. Companies offered piglets and feed, and farmers raised the pigs and sold them back at a pre-arranged price. This was supposed to free up capital for companies to invest in R&D for breeding, vaccination, feeds and market analysis, while providing farmers with stable incomes and access to technical support. The arrangement aimed to stabilize the market and smooth the pork cycle, but it also fueled the expansion of leading companies like Zhengbang.  

However, the model is controversial. Besides Zhengbang’s feed crisis in July, 2022, many farmers who signed with companies such as Wens Foodstuff Group and Shuangbaotai Group (Twins Group) publicly complained of unpaid wages and unreturned security deposits.  

The model puts individual farmers in a vulnerable position: farmers often go into debt to build facilities, while contracts give pig companies tremendous leverage over farmers, essentially placing market risks on their shoulders. 

Under Contract 
Wu Qiyi, a farmer from Jing County in Anhui Province who works with a branch company of Zhengbang subsidiary Zhengnongtong (ZNT), delivered 959 pigs to the company on July 6, 2021. As their contract shows, ZNT provides piglets and feed to Wu, who raises them and sells them back to the company at fixed prices. 
Two months later, the company informed Wu it would pay 1.5 yuan (US$0.2) and 1.05 yuan (US$0.14) less per kilogram for quality and sub-par pigs than previously agreed. 

In addition, the company denied Wu her 50,000-yuan (US$7,216) deposit and forced her to pay 36,466 yuan (US$5,263) in feed storage facilities out of pocket – all without explanation.  

First, Wu sought to settle. She asked for another 100 yuan (US$13.79) for each of the 949 quality pigs, which in total was still much lower than the contract price. But the company refused. In May 2022, Wu sued ZNT for the contract price, plus half the cost of feed storage fees and her deposit.  

The company argued Wu’s contract, signed in September 2020, only applied to her first batch of pigs. However, since no new contract was signed, the court ruled it extended to 2021.  

“Even though the market changed during the contract period, the company should have a sense of risk control and not transfer risks to the farmers,” the court wrote in its verdict. The court ruled that ZNT was in breach of contract and awarded Wu her settlement price and her deposit. The company appealed, and lost.  

Zhai Heping, another farmer in the same county, also fell on hard times. Zhai signed a contract with ZNT in December 2020. He paid a 62,650 yuan (US$9,042) deposit for 1,000 piglets.  

On June 21, 2022, the company promised to buy back 315 of the pigs on July 6. But a day before, the pigs began dying off for unknown reasons. Zhai contacted the company for help, but received none. Ten days later, all the pigs were dead.  

The company sued Zhai, claiming that he secretly sold 241 pigs on June 5, 2022 and demanded 557,654 yuan (US$80,480) in damages, plus 110,000 yuan (US$15,875) for breach of contract. Zhai countersued the company for his deposit and unpaid breeding fees.  

After an investigation, the court decided that ZNT’s claim was baseless and neither party was at fault. The company appealed, but a higher court upheld the ruling, pointing out that ZNT had not provided on-site guidance, and therefore shared responsibility for the pigs’ deaths.  

Zeng Jianfeng, of Dongkou County, Hunan Province, is among the many farmers who went millions of yuan in debt to cover the deposit. Judgment documents show that Zeng borrowed 5 million yuan (US$721,594) from Shuangbaotai Group’s financial arm, and never made the money back.  

After signing with Shuangbaotai Group’s branch in Huaihua, Hunan Province, Zeng said he raised 2,820 pigs for the company but over 1,700 died on the farm. Then the company demanded Zeng pay more than 4.25 million yuan (US$613,355) in compensation for the deaths, claiming that his on-site surveillance cameras went offline several times. The company also accused Zeng of refusing to hand over the live pigs, and ignored health regulations for feeding. Zeng claimed the pigs had contracted swine fever from a company feed truck that carried the disease from another farm.  

Some farmers took to social media, claiming they had not been paid for months or received new batches of piglets.  

Court documents from other similar cases reveal how companies refuse to return deposits to farmers. In cases of swine fever, companies usually refuse to pay farmers for their labor and breeding facilities. In response, some farmers refused to hand over the pigs. 

Boss Hogs 
First used in the poultry industry, Wens brought the model to pig farming in 1995. At the time, it was a unique way to mobilize China’s small and scattered farms to meet its huge market demand.  

“The model makes it easier for farmers to enter the market,” Chen Fengbo, an associate professor from South China Agricultural University in Guangzhou, told NewsChina. “It’s not common with plant crops, but we often see it in highly market-oriented animal farming.”  

Small farms are still the bulk of the industry. Data from Wind, a data service platform, shows that in 2017, only 407 farms in China boasted a yearly output of 50,000 pigs and above, accounting for 0.0011 percent of the total number. In contrast, 37.7 million small farms produced less than 1,000 pigs each, making up 99.8 percent of the total. Experts agree that pig farming needs to be further concentrated to alleviate shock from the pork cycle.  

“In times of expansion, when a company is not strong enough and there are high risks in the market, contracting with small farmers is very appealing,” Chen said.  

He explained this low-overhead model fuels quick expansion, freeing up companies’ resources for R&D, disease prevention and feed supply while mitigating market risks for small farmers.  

Around 2015, Wens had signed nearly 60,000 poultry and pig farmers. “The company controls key links of the industrial chain including breeding, management, and producing piglets and feed, while farmers are responsible for raising pigs,” Wens repeatedly stated in its annual reports. “With this model, the company gains the capital, land and labor it needs in expansion... optimizes resources and helps the company expand rapidly.”  

Around 2016, agricultural companies like New Hope Group and Zhengbang followed suit, scaling up their pig farming to become the industry’s top players.  

In August 2018, African Swine Fever was first detected in China. It immediately impacted pig production. As stock and sales declined and pork supplies decreased, pork prices climbed. In the last week of 2020, average pork prices in China surged to 51.65 yuan (US$7.5) per kilogram. Top farming companies rapidly scaled up contracted farming. Zhengbang, for example, produced 5.78 million pigs and signed feed contracts with 5,721 farms in 2019. In 2020, it produced 9.56 million pigs, a rise of 65.28 percent over 2019, and signed contracts with 7,951 farms, making it an industry leader. In 2019, Zhengbang increased revenues from pig sales by 49.25 percent with a year-on-year rise of 4.41 percent, while the gross profit margin of live pigs rose to 20.56 percent year on year.  

But in January 2021, pig prices took a sharp downturn and remained low for an entire year due to overcapacity and reduced demand from the catering industry due to the pandemic. Companies that had expanded rapidly suffered enormous losses, and disputes with farmers became more frequent. 

Pig Problems 
By the second quarter of 2021, pig production capacity recovered. Pork prices dropped from 36 yuan (US$5.2) per kilogram in early 2021 to 12 yuan (US$1.7) within half a year, and have since hovered between 12-18 yuan (US$1.7-2.6) per kilogram. Meanwhile the cost of feed increased.  

“The company has grown increasingly reliant on contracted farmers during its steady expansion,” Wens warned in its 2016 annual report. “As the number of contracted farmers increases, some may misunderstand certain clauses that may cause potential disputes or litigation.”  

Chen agreed. “When pork prices go down, enterprises are inclined to break their contracts. When pork prices go up, farmers are more likely to break them,” he said.  

During the last round of surging pork prices, many in the industry focused on the risk of farmers breaking contract to sell pigs to third parties for higher prices. But when prices dropped, the industry realized that farmers were more exposed to market risks than enterprises and that feed contracts put farmers at a disadvantage.  

For example, farmers cannot offload the pigs as they belong to the companies. Cases of pig cannibalism occurred when farmers ran out of feed and were not allowed to sell them. Also, once the pigs are sold, farmers are at mercy of companies to get back their feed fees and deposits.  

The high contract default rate has severely hindered large-scale application of the model and industrialization of farming, Tu Guoping, a professor with Nanchang University, wrote in a paper for the Chinese Journal of Management Science in 2010. “Market risk is the fundamental reason behind default. Through analysis we found that once prices fluctuate past a certain range, one party will inevitably breach contract,” Tu pointed out in his paper.  

Companies are making changes. Wens, for example, cooperates with farmers in the same area and funds construction of facilities with local governments. These modern pigsties allow for larger scale, more advanced technology and biosafety management. 

Meanwhile, the number of its signed poultry and pig farmers dropped from 58,600 to 48,000 between 2016 and 2021. New Hope and Zhengbang stopped releasing data in 2021.  

Zhang Weiguang, a farmer from Langfang, Hebei Province who has worked with New Hope for five years, earned back the 800,000 yuan (US$115,401) he invested in building his pigsty. He plans to raise 1,500 pigs for New Hope, something he could not afford on his own.  

“Whether the model goes well depends on the long, close and solid cooperation between companies and farmers. It particularly tests the two parties’ trust in each other,” Chen Fengbo said. 

Tools and Models 
Tu said that while improving mechanisms for risk and benefit distribution and contract enforcement could help, it does not address root market risks. Many use forward contracts, where parties agree to buy or sell an asset at a specified price at a future date.  

“Forward contracts do not allow dropouts. [Under these contracts], risk accumulates with time. Besides, market risks cannot be avoided, transferred or mitigated as the trading scope is limited,” Tu wrote in his paper.  

Tu said that pinning hopes on the existing model to change the status quo and improve contract strength is “unrealistic,” as the model merely passes market risks between farmers and companies.  

The central government has promoted scaling up animal breeding since 2007. By 2020, 57 percent of pigs available on the market came from farms raising more than 500 pigs. However, several pork cycles occurred since 2016, and with them contract disputes between farmers and companies.  

Tu suggested integrating the modern financial market into the model, as it has a relatively comprehensive and open mechanism for risk transfer and diversification. “Companies could use futures to avoid risks,” Tu said.  

He suggested that farming companies hedge the futures market when signing forward contracts with farmers to offset potential risks. “Using modern financial tools could help... channel risks outward. This might be a fundamental way to improve the implementation of contracts,” Tu said.  

In January 2021, pig futures were launched on the Dalian Commodity Exchange in Northeast China’s Liaoning Province. Futures brokers cooperate with insurance companies to provide services through special forward contracts. By the end of the year, such services were available to about 10,000 pig farmers, according to the exchange. However, pig companies and farmers are still working out how to use the financial tool and more funding for insurance premiums are needed, according to Futures Daily, a leading paper on the futures market, in October 2022.

Experienced pig farmers can reduce the impact of market risks by cooperating with companies (Photo by VCG)

People purchase national pork reserves in a store, Lianyungang, Jiangsu Province, September 17, 2022 (Photo by VCG)