Caixin
Nov 27, 2019 08:27 AM
FINANCE

In Depth: China’s Small Pig Farmers Stuck in Financing Mire After Swine Fever

China’s small pig farmers are stuck in a financial mire following the swine fever disaster. Photo: VCG
China’s small pig farmers are stuck in a financial mire following the swine fever disaster. Photo: VCG

Chen Lie (not his real name), a pig farmer in eastern Shandong province, has been struggling since June. The crushing blow was not losing his hog herd last year in the African swine fever epidemic but the financing woes in the recovery process afterward.

After 20 years in the business, Chen had 350 breeding pigs until August 2018. They could produce more than 7,000 piglets a year, making him one of the top five pig farmers in Linshu county. If not for the swine fever, he could have made a profit of 2,000 yuan to 2,500 yuan ($284-$355) a head.

Smaller, family-based pig farmers like Chen have always been the mainstay of China’s hog industry, accounting for more than half of country’s total annual production of almost 700 million pigs. But the African swine fever left them suffering the most and struggling to recover because of insufficient government subsidies, unreliable insurance and ruthless banks.

In September last year when Chen found that some of his pigs were infected, he sold some surviving animals at a discount and requested government subsidies for those that died. But he was told they were not killed by the deadly viral disease and instead by another common infectious disease, so he was not eligible for the subsidies.

His next resort was to file an insurance claim. He bought the most common livestock insurance, which, in theory, would provide as much as 1,200 yuan ($170) of coverage for a breeding pig and 600 yuan for a finishing pig. To encourage pig farmers to buy coverage, insurers promised reimbursement of no less than twice the premium they pay.

Chen eventually collected only a little more than 40,000 yuan from the insurance company for his 1,400 dead pigs, while he paid 37,000 yuan of premiums. Even the lower finishing-pig rate of 600 yuan, compensation for that many animals could work out to 840,000 yuan.

Chen took out a 350,000 yuan short-term loan from a state-owned bank in May to restart his herd. A month later, when he needed to renew the loan, he was told he had to repay it in full and take out a new one. He tapped usury lending to repay the bank, but then the bank refused to extend a new loan, citing excessive risks in pig farming. Now he faces lawsuits from rural banks and debt collections from usury lenders and feed suppliers.

Chen’s financial mire isn’t unusual for pig farmers. Six of the top 10 pig farmers in Linshu county have been listed as debt defaulters, according to Chen.

Insurers not enthusiastic

Since the first case of African swine fever was reported in China in August 2018, about one-third of the country’s hogs were killed or culled, having caused an estimated $140 billion of direct losses. Industry analysts expect the country’s pork production will drop as much as 40% this year.

Prices of the country’s favorite meat in October surged 101.3% year-on-year, pushing the consumer price index to its highest point in nearly eight years, according to data from the National Bureau of Statistics.

The State Council, China’s cabinet, has convened four meetings since August to introduce stable production and supply measures. On Sept. 6, the bank regulatory commission and the agriculture ministry jointed issued a notice asking insurers to raise coverage for pigs and banks to increase credit to farmers.

With surging pork prices, farmers are eager to rebuild their farms. But insurers are not so enthusiastic about providing coverage against a deadly disease with no vaccines or treatment.

The livestock insurance Chen bought is a kind of policy insurance. Premiums for such insurance are 70%-80% subsidized by central and local governments. Theoretically, insurers cannot decline to offer such insurance to farmers. But in practice, insurance companies cite various reasons for not providing coverage, especially to small and medium-sized pig farmers.

On the pig farming industry information platform Zhue.com, Caixin reporters found farmers around the country reporting denial or cancellation of policies by insurance companies.

A pig farmer in eastern Jiangsu province posted that he was notified by the insurer of the cancellation of his policy as the epidemic worsened in July and the pig death rate topped 90%.

The reasons for denial or cancellation cited by insurers include incomplete licenses or certificates for pig farms, such as an epidemic prevention certificate and a waste disposal permit, said a retired government official in Guangdong province who is familiar with the hog industry. Under pressure from Beijing to clean up the environment, many local governments have stopped issuing such certificates and permits in recent years. Other reasons include insufficient biosafety measures and pig farms being too small, he said.

An actuary at an insurance company told Caixin that insurers decline to provide coverage to some ineligible pig farmers as a means of risk control.

The outbreak of the unstoppable swine disease caused a change in insurers’ posture. Before the outbreak, insurers actively encouraged pig farmers to buy livestock insurance. Local pig farming associations and veterinary hospitals would also voluntarily promote such insurance, the retired official said.

Even before the outbreak, insurers were under claims pressure in their livestock business because of high risks in the industry and large workloads in claim settlement.

People’s Insurance Co. of China (PICC) accounts for nearly half of the country’s agricultural insurance market. In the first nine months of 2019, the insurer provided 96.2 million yuan of coverage for 141 million finishing pigs and 9.35 million breeding sows. The company’s pig insurance business has long run losses as claim payments, operation costs and administration expenses exceeded premium revenue.

In its half-year earnings report, PICC disclosed it made net claim payments of 7.31 billion yuan during the first six months this year, up 24.3% from a year ago. The loss ratio of its agriculture insurance climbed to 75.9% from 62.8% a year ago.

Before the outbreak, the loss ratios for pig insurance ranged from 50% to 60%, Caixin learned. After the outbreak, most insurers’ loss ratios on such policies reached 100%, multiple industry participants told Caixin.

Under-reporting by local governments

When insurance companies receive claims from pig farmers, whether they pay for losses due to African swine fever also depends on whether local governments have reported the death of the pigs as a result of the disease.

A pig farmer in Hunan province said he filed a claim in June and still hasn’t received payment because the insurance company said the local county government didn’t report the death of his pigs as a swine fever case.

To stop the spread of the deadly disease, farmers are required to cull all their pigs once an African swine fever case is confirmed, and they are promised to be compensated 1,200 yuan per culled pig from central and local governments. But for some cash-strapped local governments, they might choose not to report the disease to avoid subsidy payments.

In 2018, the central government assigned 6.8 billion yuan of animal epidemic prevention funding and an additional 5.5 billion yuan for this year. On top of that, the central government distributed 499 million yuan of culling subsidies. But local governments are supposed to share the cost of culling. For eastern provinces, where Chen lives, central subsidies cover only 40% of the cost, while local governments are responsible for the rest. For less-developed western provinces, the central subsidies can cover as much as 80%.

Since the government subsidies are for live pigs to be culled, and livestock insurance pays for pigs that are already dead, some local governments would deliberately delay issuing inspection certificates and wait for infected pigs to die instead of being culled, leaving the issue to insurers, an agricultural insurance industry participant told Caixin.

Fraud activities related to the epidemic have also put pressure on insurers. Some farmers were found having killed healthy pigs and claiming the deaths were caused by swine fever. Some purchased pigs suspected of being infected at a very low price. If the pigs turned out not to be infected, they would sell them; if the animals died, they would file insurance claims.

Industry to be dominated by big players

Eager to rebuild the country’s pig industry, China’s state planner has launched a series of measures to restore pork production, including subsidies of as much as 5 million yuan to support the construction of large pig farms.

Taking advantage the policy support, big listed companies, including tech giant NetEase Inc., have moved to acquire or build pig farms. But smaller pig farmers like Chen now face difficulty getting loans from banks to rebuild their herds. As a condition for extending loans, banks require pig farms to have stable upstream suppliers and downstream sales channels, which many smaller farms lack, a city commercial banker told Caixin.

Jia Hengxin, who operated the second-largest pig farm in Rongshui county, Guangxi province, said he couldn’t get loans from banks because his farm mainly supplies the local market and has no big companies as downstream channels.

One solution for smaller pig farmers is to form cooperatives or to enter into supply contracts with big companies to enhance their credibility for obtaining loans, suggested Pan Chenjun, senior analyst at Dutch financial services company Rabobank.

In the future, it will be an unavoidable trend for smaller players to be squeezed out of China’s pig industry, which will be dominated by big companies and medium-sized family farms or cooperatives, Pan predicted.

Contact reporter Denise Jia (huijuanjia@caixin.com)

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