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Jim Trippon is an Amazon.com bestselling business and finance author, a practicing CPA, and a fee based investment advisor. His portfolio of companies includes J.M. Trippon & Company CPA, Trippon Wealth Management & Trippon Financial Publishing. Jim has dedicated his business career to... More
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  • Pain at the Pig. China's Inflation Creates Opportunity 1 comment
    Jul 25, 2011 8:36 AM | about stocks: HOGS, BG, ADM, CAT, DE, POT, MOS
    Why have we have all suffered through those "Pain at the Pump" TV news stories? Well, for Americans, ballooning gas prices are a key pressure point of consumer price inflation.

    But, for the Chinese, it's all about pigs.

    Half of all meat consumed in China is pork. Pork is a treat that only the middle and upper classes can afford to eat regularly. And, as China's wealth grows, so does it's appetite for more and more pork. Amazingly, the average Chinese consumer eats four times as much pork as he or she did just four years ago.

    That's why prices for China's favorite meat ballooned by 57 percent in June (year-over-year). And now, the soaring cost of pork is a major driver of inflation in China.

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    Beijing sees inflation, especially food price inflation, as a threat to social stability. Unlikely as it might seem to us, that reality makes pork pricing a key element of China's national security. If people are angry about food prices, they are angry at the government.

    For China, the answers are not always easy or simple. In China's command economy many problems can be addressed with the stroke of a pen. If it takes cash, China has plenty. With more than $3 trillion in foreign reserves, it is not difficult to shell out a few hundred billion to build new highways or airports.

    But hogs take time to grow. Many are raised on small family-run farms. Previous dips in the price of pork have made many farmers wary of breeding large herds. After all, if prices are low and a hog can't be sold at a profit the breeder is hemmed in.

    One choice is to slaughter the animal and lose money. Or he can wait for a rise in prices but he'll have to feed the animal every day as he waits. Farmers are naturally cautious. And that's why there is a shortage of China's staple protein with skyrocketing prices right now.

    HOGS for Investment

    One of the best known Chinese pork producers on western stock markets is called Zhongpin Incorporated. Shares shot up more than ten percent last Friday as U.S. investors became aware of China's pork shortages. It trades under the symbol HOGS.

    Looking at the numbers, HOGS seems attractive. It is selling below book value and has a stunningly low PEG ratio of 0.41 with a forward P/E of only 4.82.

    But be careful with this stock. Pork price inflation and attractive numbers aren't enough to assure stock performance in this market environment.

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    Zhongpin is one of the stocks to fall under the cloud of suspicion which has affected many Chinese reverse merger listings.

    A reverse merger is a money-saving way to list on western exchanges. In some cases, smaller Chinese firms have listed on western exchanges by "merging" with a failing North American firm that already has a stock market listing – in effect buying a listing. Then, with a quick change of company name and symbol, all of the usual paperwork and formalities are avoided and the new firm is on the market.

    Unfortunately, a number of now famous reverse merger Chinese firms have been accused of fraud. Shares have plunged and short-sellers have made millions.

    No one has accused Zhongpin of fraud, although it has reported disappointing earnings on a number of occasions. Nevertheless, short sellers have taken a run at the stock and made money in recent months. Shares are down more than 40 percent over the past half year.

    This half-billion dollar company is involved in every aspect of China's pork production and marketing. Its valuation appears to be a bargain. Is it a buy?

    Not yet. I remain wary of HOGS until it produces a blowout earnings season. Only a big earnings surprise will free Zhongpin of the cloud that shadows so many Chinese reverse merger companies.

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    Alternate Investments

    Beijing is now hustling to satisfy the nation's appetite. The Commerce Ministry is releasing part of China's 200 thousand metric ton stockpile of pork onto the market. But that's not enough meat to drive prices down sharply. And, with feed prices rising, hog breeders are nervous about their next step.

    For western investors, the best way to participate in China's growing wealth and demand for protein comes out of a column I wrote just a week ago. As I mentioned then, China had ordered a stunning 540,000 tons of the corn in just week! That was as much as the U.S. had expected to sell to the Chinese all year.

    Clearly, the Chinese need to drive feed grain prices down domestically at the farm level, and they are prepared to use government buying power to make that happen. David C. Nelson, a global strategist and investment banker to many of the world's biggest food concerns told the Wall Street Journal: The Chinese "are on the cusp of needing a whole lot more corn than they can produce."

    Shares of some of the major companies in the global grain market have yet to respond to growing Chinese demand. Bunge Ltd. (NYSE:BG) and Archer Daniels Midland (NYSE:ADM) performed better than the market as a whole but still lost ground last week. Both companies have remarkably low P/E multiples.

    Farm equipment and machinery makers Caterpillar (NYSE:CAT) and Deere (NYSE:DE) have higher P/E multiples. They are well diversified profitable firms but they also sank marginally on volatile market conditions.

    Fertilizer producers Potash Corp. (NYSE:POT) and the Mosaic Company (NYSE:MOS) gained heavily when news about China's unexpected grain demand was first released, but turned in mixed performances in the following five days of trading. Monsanto (NYSE:MON), known for its seed business and DuPont (NYSE:DD), a firm with a major hand in seeds and pesticides have yet to show gains as North American markets wobble due to Washington's debt worries.

    That's the short-term news. But as the saying goes, the trend is your friend. All of these stocks are on a long-term upswing. And, soaring demand from China is likely to support this trend.

    At worst, China's growing appetite for pork and feed grains is likely to put a floor under the values of these multinationals. And, all of them are dividend payers, although the payout from the fertilizer producers is relatively small.

    Once again, I believe China's growing consumption will be an engine that moves markets long term.

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  • jimidean
    , contributor
    Comments (160) | Send Message
     
    With all due respect, Per the attached FAS figures, China's domestic pork consumption in 2006 was 46.5 million Metric Tons. The estimate for 2011 is 51,500 million Metric Tons. Given the positive population increase over this time frame, the average Chinese consumer per capita domestic consumption was flat to slightly positive. Gross domestic consumption over this time period increased at CAGR of 2.06%. Certainly, not a four fold increase. To have a four fold increase, 2006 levels would have to have been around 13,000 million Metric tons. The real reason for the current pork price in China is the lack of supply and the higher cost of raising pigs, the rate of consumption has very little to do with the recent spike in pork prices. Maybe you can provide a source for your four-fold increase statement.

     

    www.fas.usda.gov/dlp/c...
    25 Jul 2011, 03:29 PM Reply Like
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