How to Break into China's Piggy Bank

Tony Sagami

Winter was the slow season on my family's farm, so I worked as a bus boy at a local Chinese restaurant when I was in high school.

It wasn't an easy job -- but it was a hundred times easier than working for my demanding father. Even better, it paid several times more than what my parents paid me.

Plus, the restaurant job included a big bonus that every teenage boy wants: food! Every shift included a free meal. I ate a mountain of pork-fried rice and sweet & sour pork, my two favorite Chinese dishes at the time.

My tastes have changed dramatically since I was in high school, but the popularity of pork dishes, Chinese or not, is worldwide.

According to the National Pork Producers Council, pork is the most popular meat in the world. In fact, some 44% of the world's protein intake comes from pork.

And while we don't have exact figures on how much of the world's profits come from pork, I can assure you that the Chinese are spending a pretty hefty part of their food budgets on pork.

China's New Middle Class Is Bullish On Pork

Nowhere in the world do people love pork more than in China. From mu shu pork to char siu bao (barbecued pork buns), pork is a staple of the Chinese diet.

In fact, China alone consumes roughly half of the world's pork and 70% of all the meat consumed in China is pork.

China consumes seven times more pork than the world's No. 2 pork consumer, the United States. Think about that ... 7 TIMES AS MUCH!

China devours 92 billion pounds of pork a year, which works out to about a fifth of a pound a day for every man, woman and child.

You've heard about the ancient army of 8,000 terra cotta warriors in Xian? Those warriors were supposed to help Emperor Qin Shi Huang rule another empire in his afterlife.

Did you know that the burial pit included rows of terra cotta pigs as well? After all, Emperor Qin and his army would have to eat in the afterlife. The inclusion of pigs shows pork has been important to the Chinese diet for centuries.

China's already gigantic pork consumption is set to get even bigger. According to researcher firm Frost & Sullivan, China will account for 80% of the growth in global pork consumption in the next five years.

The reason for the rising demand is simple:

Rising incomes = Higher protein consumption.

Rapid economic growth is raising the standard of living for much of China. In 2004, per capita Gross Domestic Product was just $1,000. By 2013, it had increased by almost 700% to $6,800.

What's the first thing you would buy if your income went from subsistence to middle class? A Mercedes? A Rolex? Maybe, but for most people, I think the first thing would be better food.

Rising income is driving a dramatic change in Chinese eating habits. The middle class is no longer content to eat rice and cabbage with an occasional pig knuckle or chicken foot as a treat.

They want fruit, candy, dairy products ... and particularly meat.

The wealthier a nation becomes, the more meat products its people consume. As the Chinese economy continues to boom, you can expect its citizens to eat more and more pork.

Is there a way to profit from the Chinese love for pork? No, and yes ...

The Chinese Piggy Bank:
Strategic Pork Reserves

You've heard of Strategic Petroleum Reserves...but Strategic Pork Reserves? As funny as that may sound, China maintains a vast reserve of emergency pork.

Since the late 1990's, the Chinese government has built and maintained an emergency reserve of both frozen and live pigs. It is estimated that China has a reserve of 1.6 million frozen as well as hundreds of thousands of live pigs.

We're talking about a mountain of pork meat. A mature hog typically dresses out to around 130 pounds, which works out to over 200 million pounds of meat!

The reason for the reserves is to protect the food supply in case disease or natural disaster strikes. Last year, 'blue ear' disease affected 25 of China's 33 provinces and destroyed an estimated 25% of the pork livestock.

Don't snicker too hard about China's pork reserves. Many countries keep food reserves. The U.S., for example, maintains a huge grain reserve and Japan has stockpiled a mountain of rice.

Option #1: WH Group Ltd. The largest pork company in the world, WH Group Ltd, decided last week not to make its debut on the Hong Kong Stock Exchange, and returned investors' money to the tune of $1.9 billion.

If that name sounds vaguely familiar, the same Chinese company bought Smithfield Foods for $4.7 billion in 2013.

Will the company go the IPO route again? Time will tell, but if it does, this is a company worth watching.

One that pork-hungry investors could feast upon right now, however, is …

Option #2: Hormel Foods. It never ceases to amaze me at how unwilling U.S. investors are to invest in foreign stocks.

Buying stocks on major foreign markets like Germany, Japan, the United Kingdom, and Hong Kong is as easy and cheap as buying U.S. stocks.

Nonetheless, if you insisted on sticking to U.S. companies, you could buy Hormel Foods (HRL), which is currently trading a few cents below $48 per share.

While not a pure play on pork, Seaboard Corp. (SEB), which produces grains, hogs, and sugar on three continents and owns a small fleet of ships to transport its products all over the world.

SEB is also a $2,400 stock, so if you want a pork fix, it may be cheaper to hit the grocery store instead!

I'm not suggesting that you rush out and buy any of these stocks tomorrow morning, but food in general and pork in particular are big-picture, long-term growth opportunities. They deserve consideration for space in a well-balanced portfolio.

Best wishes,
Tony Sagami

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Posted 05-06-2014 1:35 PM by Tony Sagami
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