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BEIJING: Once every three to four years, hog farmers in the world’s largest producing country find themselves trapped in an unforgiving market that pushes some over-leveraged breeders to the brink of a debt crisis.

Jiangxi Zhengbang Technology Co, the second-largest hog supplier among Chinese listed companies in 2020, just reported 542 million yuan (US$81mil or RM356mil) of overdue commercial bills, becoming the latest producer to show the financial stress of the boom-bust cycle. The nonpayment comes after it lost about three billion dollars since the start of last year amid a halving in hog prices.

“Zhengbang expanded its capacity too aggressively at the wrong time and found it hard to manage the situation when hog prices tumbled,” said Lin Guofa, head of research at consultancy Bric Agriculture Group.

With pork the most popular protein on Chinese tables, hog breeding can be very profitable with gross margins rising above 30% for some producers when there’s a shortage, driving farmers to expand capacity despite soaring costs. Still, even for the top producers, it’s not always easy to follow the right beat.

China’s top five listed hog breeders recorded more than 39 billion yuan (RM25.6bil) of net losses last year alone.

Zhengbang Technology represented just under half of that, while Wens Foodstuffs Group contributed about a third. Other companies that posted losses included Tech-Bank Food Co and New Hope Liuhe Co.

Zhengbang Technology sold about 5.5 million hogs back in 2018, when a long price slump hurt breeders, leading Chuying Agro-Pastoral Group for instance to default and offer to pay bondholders with ham.

Chuying was eventually delisted from the stock market and its bondholders are yet to get their money back.

Just three years later, Zhengbang had almost tripled its output capacity to 15 million hogs with total assets doubling after the company built and leased more farms and increased the amount of livestock it was breeding.

Still, the expansion didn’t bring the intended good fortune, only trouble. The boom in hog prices after African swine fever devastated herds faded earlier than farmers expected. Zhengbang not only had to grapple with declining revenue, but it also booked losses from asset and inventory depreciation.

Zhengbang Technology’s shares slumped as much as 15% to the lowest level since 2018 since it reported the overdue debt last Wednesday. The company did not reply to a Bloomberg email seeking comment on its debt issue. In December, Zhengbang signed a debt-to-equity swap with the Jiangxi branch of China Cinda Asset Management Co, a leading distressed debt manager. And three months ago, a key Jiangxi state-owned company agreed to provide five billion yuan (RM3.3bil) financial support to Zhengbang Technology’s parent.

Despite those efforts, the company still had 40.7 billion yuan (RM26.7bil) of liabilities on its balance sheet at the end of March, only just covered by its total assets, according to its financial report. While hog prices are now recovering, offering a chink of light, the future may also hinge on whether it can obtain more cash from asset disposals and receive timely government support. — Bloomberg