The core secret to resisting downturns against the trend: the independent characteristics of the breeding sector and the underlying logic of the hog cycle

Host: Since March, the domestic capital market has experienced significant fluctuations. In this market situation, the entire agriculture and breeding sector has shown relatively strong resistance to declines. Therefore, investors are quite concerned about what new changes and new logic this sector might have recently.

Many investors are also interested in the correlation between the breeding sector and the overall market trend. Are their trends similar? What is the difference between buying the breeding ETF Guotai (159865) and buying the CSI 300?

Fu Han: I think this question directly highlights the positioning of the breeding sector in the capital market. The answer is simple: it is one of the industries with the weakest correlation to other industries.

This correlation stems from its biological nature: breeding essentially involves raising pigs, and the resulting supply cycle is significantly different from the cycles of ordinary food commodities; this is the core reason for the low correlation.

What benefits does this correlation provide for investment? Investing in the breeding sector can significantly reduce portfolio volatility. We have statistically found that historically, the correlation of the breeding sector with the five major styles of CITIC can basically define it as a sixth style, with a correlation lower than any of these five styles. Therefore, the data also indicates that the breeding sector has a good effect on reducing portfolio volatility, which is the first point.

The second point is that its own cyclical operation logic is very unique. When the overall market performs blandly, the breeding sector is likely to walk out an independent market trend based on its own logic, which is also the direction of the current market evolution.

In simple terms, buying the CSI 300 is investing in the A-share market, while buying the breeding ETF Guotai (159865) fundamentally invests in the pig cycle, and the driving factors for the two are completely different.

Host: Okay, Mr. Fu just mentioned a very key term—the pig cycle. What exactly is the pig cycle? Can you explain it in simple terms?

Fu Han: The pig cycle is actually quite simple. From the perspective of the entire process of pig farming, it is essentially a supply cycle.

In simple terms: when pigs are raised in excess, the oversupply will lead to losses; after incurring losses, everyone will reduce breeding, which decreases the supply of pigs, and then pig prices will rise; when pig prices rise, everyone will increase breeding again; this is the cyclical pattern on the supply side.

Specifically, why does this characteristic exist? When pig prices rise, farmers can make profits and are highly motivated to restock and increase investment. However, the problem is that there is about a 10-month cycle from restocking to market-ready pigs—from the sows giving birth to the piglets being fattened for sale, which takes 10 months to a year.

Thus, the restocking capacity released by the rising pig prices requires a time lag before it can be put on the market. This converging behavior of restocking and reducing stock will cause significant lagging fluctuations in the market.

If pig prices fall, the situation is reversed: farmers start to exit, the inventory of pigs decreases, and market supply contracts. But this contraction in supply will only manifest as reduced supply 10 months to a year later, and pig prices will only rise again at that time. This mismatch between supply and demand forms the cyclical nature of the pig cycle.

Historically, China has experienced multiple rounds of the pig cycle, with each round lasting about 3-5 years. The documented history began in 2006: 2006-2010 was the first round, triggered mainly by blue ear disease; the second round was from 2010-2014, triggered by porcine epidemic diarrhea virus and foot-and-mouth disease; the third round was from 2014-2018, led by environmental protection policies; the most recent round was from 2018-2022, which was also the strongest super pig cycle in history. This round was driven by African swine fever, industry losses, and the cyclical rhythm of the A-share market itself. So each round has different triggering factors, but the underlying logic is the supply and demand mismatch caused by biological properties.

Host: Now, talking about the pig cycle, I want to ask a question from the consumption side: will there be significant fluctuations on the consumption side? For example, if everyone stops eating pork, will this situation cause marginal dysfunction of the pig cycle?

Fu Han: I think this concern can be understood like this: the pig cycle we just talked about is essentially a supply cycle.

Consumption, on the other hand, is the demand side for pork. From an overall perspective, the annual fluctuations in pork demand are very small: eating pork is a tradition for Chinese people, and everyone has always loved eating pork, so the annual consumption of pork fluctuates little.

The only exception is the African swine fever period from 2018-2022: at that time, people were worried about the health risks of sick pigs, which reduced consumption and caused a dramatic drop in pork demand. But such external shocks are very rare, so the annual fluctuations in pork demand remain overall stable.

Therefore, the core driving factor of the pig cycle is the supply side, not the demand side. Even if there are seasonal fluctuations in demand throughout the year, it will return to the mean, and the overall annual demand remains robust. In other words, the core contradiction behind the current rise and fall in pig prices is on the pork supply side, not the demand side. When analyzing, attention should be focused on the performance of the supply side.

From an investment perspective, we are currently at the early stage of reducing the inventory of breeding sows, which is a good time for left-side layout of pig cycle stocks. The sector’s valuation is at a historical low, and the allocation ratio of public funds is extremely low, leaving ample room for future increases. The breeding ETF Guotai (159865) tracks the CSI All Share Animal Husbandry Index, with nearly 60% weight on pig-related businesses, and the top ten component stocks are mainly led by industry leaders such as Muyuan Foods and Wens Foodstuffs Group, naturally aligning with the logic of benefiting first from the current cycle. The product’s latest size has reached 5.4 billion yuan, ranking first in the industry, and its high elasticity and high purity characteristics align with the trend of the market switching to value cycle styles while also adapting to both recovery and stagflation expectations, making it an efficient tool for ordinary investors to layout the pig cycle with one click.

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