Forecast 2017: A trough for the pork market or a recovery?

Thread Content

Forecast 2017: A trough for the pork market or a recovery? Author/Source: Date: 2017-02-14 Clicks: 31 I. Forecast for the overall situation of China’s agricultural inputs market in 2017 At the beginning of 2017, the 14th Central No. 1 Document since the new century was released under the authority of Xinhua News Agency; this document outlined the main directions and focus areas for China’s work related to agriculture, rural areas, and farmers in this year and for some time to come. At present, the main contradiction in China’s agriculture has shifted from a shortage in overall volume to a structural one, manifested primarily by the coexistence of periodic oversupply and supply shortages. The roots of contradictions and problems lie on both the supply and demand sides of agriculture, but the main aspect of these contradictions is on the supply side, where structural and institutional contradictions are prominent. Therefore, the document clearly calls for further advancing structural reforms on the agricultural supply side. Such reforms should aim primarily at increasing farmers’ incomes and ensuring an adequate supply, focus on improving the quality of agricultural output, and rely on institutional reform and innovative mechanisms as the fundamental approaches. This article will primarily discuss and forecast the trends in the agricultural inputs market in 2017 from the supply side perspective. 　　From the supply side, on the one hand, overcapacity remains a serious issue, and low-level, disorderly competition is still widespread; therefore, industry restructuring and optimization are imperative. Taking the fertilizer industry as an example, the total production capacity of the four main types of fertilizers – nitrogen, phosphorus, potassium, and compound fertilizers – exceeds 110 million tons (in terms of pure content), while the actual annual demand is only around 60 million tons (in terms of pure content). Thus, the capacity surplus rate is nearly 50%. On the other hand, the industry as a whole lacks competitiveness, with high production costs that significantly reduce the profit margins of enterprises; therefore, there is an urgent need for industrial upgrading. With the increasing demands for safety and environmental protection, as well as the abolition of various preferential policies related to agriculture, companies will need to increase their investment in product technology and quality in order to survive. In the short term, this will further raise the production costs for agricultural supply companies, putting more pressure on their profits and survival prospects. Moreover, industrial upgrading requires a certain period of adjustment. 　　Regarding fertilizer products, which play an important role in the supply of agricultural inputs, we will conduct a detailed analysis and make predictions regarding their market performance in 2017. Overall, the fertilizer industry has remained sluggish over the past two years, with prices of major fertilizer types experiencing significant drops to varying degrees. The prices of single-element fertilizers such as nitrogen, phosphorus, and potassium all dropped by more than 20%; the price drops for urea and phosphate fertilizers were even over 40% ； The price of compound fertilizers has also dropped by about 15%. Although the prices of agricultural inputs such as fertilizers tend to rise at the turn of the year due to factors like rising energy costs, on the one hand, the prices of various types of fertilizers will remain stable at reasonable levels owing to production costs; on the other hand, the overall agricultural input market will keep fertilizer prices low. 　　II. Discussion and forecasts on new types of fertilizers such as nitrogen, phosphorus, potassium fertilizers and compound fertilizers Nitrogen fertilizers: In the first half of 2016, the nitrogen fertilizer industry faced its most severe challenges ever; prices in major urea-producing areas such as Shanxi dropped to 1,050 yuan per ton, the lowest level in 15 years. At the peak in 2016, production capacity that was shut down amounted to 18 million tons; actual production fell by 12 million tons compared to 2015. Although exports decreased by 5.6 million tons compared to the previous year, overall supply still dropped by 6.4 million tons, thereby significantly reducing the oversupply situation. 　　Based on the current level of production, overall supply in 2017 is expected to be tight, especially during spring when nitrogen fertilizers account for 40% of total annual consumption; there will be temporary shortages of supplies in certain markets. Coupled with support from the international market, it is not likely that domestic prices will drop significantly for now. However, the sharp drop in corn prices in 2016 due to the use of high amounts of nitrogen fertilizer will lead to a significant reduction in the area devoted to corn cultivation in 2017, resulting in a decrease in the demand for nitrogen fertilizer. 　　At the same time, the slowdown in the real estate sector will also affect the usage of plywood, and demand from the urea industry will be somewhat suppressed as well. From the supply side, some urea manufacturers that ceased production recently are planning to resume operations, and even some companies that have been shut down for a long time have plans to restart production, which will put further pressure on market conditions. Overall, the elimination of outdated production capacity is a necessary pain point in the supply-side reform; if such outdated capacity resumes operation on a large scale in 2017, it is possible that market prices could once again deal a severe blow to the nitrogen fertilizer industry in the second half of the year. 　　Phosphatic fertilizers: Since 2016, due to a combination of factors such as an severe oversupply of production capacity, rising freight costs, the elimination of industry-related incentives, and ongoing adjustments in agricultural planting patterns, the production costs for phosphatic fertilizer manufacturers have generally increased, while prices have continued to fall. As a result, these companies have suffered losses on a widespread scale, and the phosphate ammonium industry has fallen into a downturn. 　　Faced with the challenges in the industry, since 2017 some phosphate fertilizer manufacturers have accelerated their efforts in innovation and transformation. By adjusting their product portfolios and producing new types of value-added fertilizers, they have managed to reduce the supply of phosphate fertilizer products on the market, thereby alleviating the situation of oversupply. As a result, sales prices have risen. Moreover, differentiated products generate significantly better economic benefits than ordinary phosphate fertilizers, giving these companies greater motivation to pursue transformation and improvement ； On the other hand, phosphatic fertilizer companies have strengthened their ties in areas such as technical exchanges, sulfur procurement, and fertilizer sales, achieving phased results in their efforts to help themselves within the industry. 　　Furthermore, the elimination of export tariffs does not yet have a significant positive impact on phosphate fertilizer prices at present, but it remains important for enhancing the international competitiveness of phosphate fertilizer companies, improving export efficiency, and alleviating domestic supply pressures. It is also worth noting that the national environmental inspections that began in 2016 will become even stricter in 2017. Against this backdrop, the phosphate ammonium industry is expected to gradually emerge from its downturn and experience a slow recovery in 2017. In terms of price, it will remain relatively stable during peak demand periods, with only slight fluctuations in off-peak times. 　　Potassium fertilizers: Since the second half of 2015, affected by the economic situation, the continuous decline in commodity prices, and the reinstatement of value-added tax, the domestic fertilizer market has shown a rapid downward trend. In 2016, the CIF price for joint negotiations on potassium fertilizer imports was $219 per ton, which represented a decrease of $96 per ton compared to 2015; it was also the lowest price since 2008. Lower market prices also stimulated a recovery in demand; the potash fertilizer market began to rebound in the fourth quarter of 2016, with prices showing an upward trend. It is expected that the potash fertilizer market will continue to recover in 2017, with prices showing a steady upward trend. 　　Compound fertilizers and new types of fertilizers: In 2017, compound fertilizers will also see adjustments in line with the price trends of various basic fertilizers. Composed fertilizer products have greater characteristics as distributable goods compared to several basic fertilizers, which is why their prices are the most stable. 　　However, through years of monitoring the relationship between fluctuations in the prices of compound fertilizers and those of basic fertilizers, we have found that, in addition to being affected by the costs of basic fertilizers which in turn influence price fluctuations in compound fertilizers, these fertilizers compete with products such as diammonium phosphate, agricultural potassium, and agricultural urea in different regions and seasons. Depending on the cost-effectiveness of compound fertilizers at various times, a certain substitution relationship emerges in local markets with these competing products, and changes in demand then lead to adjustments in prices. The ratio of price fluctuations for compound fertilizers compared to their competing products remains within a certain range. 　　Therefore, although the price of traditional compound fertilizers remains stable compared to that of basic fertilizers, the impact of price changes will also affect them in a delayed manner, causing their prices to fluctuate within the same range as those of basic fertilizers. Among them, new types of fertilizers tend to have more independent pricing due to their differences. The higher their technical content and the lower their substitutability, the less their price is influenced by costs and the prices of competing products. Such fertilizers often deliver better yield-enhancing results for farmers and generate substantial profits for all segments of the supply chain. This is why leading compound fertilizer manufacturers in the market are shifting their efforts in research and development as well as promotion toward differentiated products. 　　Within the trend of reform in the agricultural supply side, and against the backdrop of the ongoing modernization of agriculture in our country, differentiated products that meet the needs of modern agriculture are increasingly recognized in everyday use, and will ultimately enhance their share and influence in the market. 　　Furthermore, from the demand side, on the one hand, **given the initiative to achieve zero growth in the use of fertilizers and pesticides and the fact that farmers generally earn low incomes, demand for agricultural inputs will be further suppressed ； On the other hand, adjustments in the planting structure and production methods will increase farmers’ demand for scientific farming practices, leading to a growing need for new products, new technologies, and agricultural services. The fluctuations on the demand side deserve special attention from those working in the agricultural inputs industry. 　　In summary, 2017 will undoubtedly be a year marked by both opportunities and challenges, with concepts such as \"transformation,\" \"adjustment,\" and \"reform\" becoming the main themes of the agricultural inputs market in that year. 　　We have reason to believe that as the supply-side reform in China’s agriculture progresses further, China’s agricultural inputs market will surely regain its vitality after going through the pains associated with reform. However, rime does not form in a day, and it will take some time before the ice and snow in our country’s agricultural supplies market melt away. 　　It is expected that in 2017, China’s agricultural supplies market will gradually recover under the combined influence of both the supply and demand sides. 　　III. Key Focus Areas in China’s Agri-input Market in 2017 In 2017, shifting the mode of agriculture, adjusting its structure, and promoting reforms will remain the main priorities for China’s agri-input market. Special attention should be paid to the following areas: (I) Achieving zero growth in the use of fertilizers and pesticides. In terms of chemical fertilizers, the fertilization structure is further adjusted to optimize the ratio of nitrogen, phosphorus, and potassium, promote the combination of major elements with medium and trace elements, and accelerate the development of soil-testing-based fertilization ； Precise fertilization is being promoted on a wider scale; through partnerships between agricultural enterprises, integrated water-fertilizer management techniques such as mechanical deep application, sprinkler fertilization, and drip irrigation fertilization are being adopted in major grain-producing areas and regions where horticultural crops are grown, thereby improving the efficiency of fertilizer and water resource utilization ； Reduce the use of chemical fertilizers by substituting them with organic fertilizers, promote clean agricultural production, and actively encourage the application of organic fertilizers. 　　(II) Focus on the transformation of traditional agricultural input enterprises into comprehensive service providers. **By encouraging various approaches such as the transfer of management rights, share-based cooperation, contract farming, and land trusteeship, the development of large-scale farming models based on land circulation and service provision is accelerated, leading to the continuous growth of new types of agricultural business entities and service providers. This forces agricultural input companies to enhance their service orientation, shifting from traditional product sales to the provision of services, and it promotes the transformation of traditional agricultural input distributors into modern comprehensive agricultural service providers. 　　(III) Focus on the sustainable development of rural e-commerce. With the integration of the Internet industry and processing and distribution enterprises into the agricultural supplies sector, the development of e-commerce platforms for agricultural supplies and rural e-commerce service stations will be accelerated. Meanwhile, efforts will be made to strengthen the logistics system from townships to villages, thereby streamlining the traditional hierarchical structure of agricultural supplies distribution channels and improving the efficiency of such distribution. 　　(4) Focus on reforming the price formation mechanisms and purchase-storage systems for important agricultural products such as grain. **We will give equal importance to adhering to a market-oriented reform approach and protecting farmers’ interests. By adopting a method of “implementing measures tailored to different crops and progressing step by step”, we will improve the market regulation system for agricultural products and boost the enthusiasm of growers for grain cultivation. This will inevitably put downward pressure on the profitability of the agricultural inputs industry. In the future, only those enterprises that possess a cost advantage and can help growers improve their input-output efficiency and economic benefits will thrive. 　　IV. Market Planning and Strategies for 2017
Faced with the complex and challenging situation in China’s agricultural inputs market in 2017, as well as the needs of its own strategic development, Sinochem Group will actively respond to relevant policies. Aiming at meeting the demands of end-users, it will strive to advance supply-side structural reforms. By integrating internal and external resources and leveraging its competitive advantages, Sinochem aims to continuously increase its market share and industry standing in China’s agricultural inputs sector, while accelerating its transformation and upgrading. The main measures include: (1) Actively implementing supply-side structural reforms, and adjusting and optimizing the capacity layout in line with market demands ； 　　(II) Strengthen internal business coordination so that operations can generate a synergistic effect; both traditional and developmental businesses must be given equal attention and developed robustly ； 　　(III) Strengthen the development of agricultural input distribution channels; while expanding market share, place greater emphasis on improving the quality and efficiency of these channels as well as enhancing their coordination ； 　　(IV) Enhance the capability in developing new products, promptly respond to market and end-user demands, promote product upgrades and optimization of the product structure. At the same time, leverage the strengths of Sinochem’s agricultural inputs product portfolio to continuously meet users’ diverse product needs ； 　　(5) Strengthen the unified brand positioning and promotion of Sinochem Agri-Industry to enhance the market premium power of the Sinochem agrochemicals brand ； 　　(VI) To meet end-users’ needs for comprehensive agricultural services, we will not only provide traditional agricultural inputs such as seeds, fertilizers, and pesticides, but also offer farmers a full suite of agricultural service solutions, including agrochemical services, planting services, agricultural machinery, grain storage, processing, agricultural big data, and agricultural finance. This will help farmers continuously increase their farming profits and ensure the supply of agricultural products. (Agricultural Inputs and Markets)