China's WH Group on Tuesday reported a 16.9% fall in first-half profit as higher meat prices due to a devastating hog disease hurt margins at the world's top pork processor.
Profit attributable to owners of the company, before biological fair value adjustments, came to $463 million (€412.8 million) compared with $557 million (€496.6 million) a year earlier, while operating profit fell 11.8% to $765 million (€682.01 million).
African swine fever, which has swept across China over the past year, is fatal to pigs but does not harm people. China's pig herd - the world's largest - shrank 25.8% in June compared with the same month a year earlier due to the disease, while the sow herd shrank 26.7%, according to official data. Many believe losses are more than twice that number, however.
'The Greatest Challenge'
"We anticipate the greatest challenge in China is the continuously soaring hog prices as a result of growing supply shortages, which will push down our packaged meats margin," the company said in a statement.
Live pig prices have climbed strongly since mid-June and in some areas, such as populous Guangdong province in the south, they have doubled since April to almost 28 yuan ($3.96)a kilogram.
WH Group said that sales of packaged meats in China were flat as the consumer market slowed and the firm raised prices.
But operating profits from the segment declined substantially as pork and chicken costs rose, and the company spent more on marketing.
In Europe, higher costs also reduced the benefit from stronger sales but a push to higher value products in the United States saw a strong gain in profits.
Packaged meats make up more than half of the group's revenues, which came to $11.1 billion for the six months. The sector accounted for almost all of the operating profits.
Speaking to reporters, Ma Xiangjie, president of the group's China unit, Henan Shuanghui Investment and Development, said the company had raised prices three times during the first half.
It would continue to raise sales prices and introduce higher value products to offset high raw material prices that will continue into next year, he said.
Opportunities For Expansion
He added that the pressure on China's farming and slaughtering sectors from African swine fever and the trade war offered the group opportunities for expansion. He did not give further details.
In China, the group slaughtered 8.58 million pigs in the first half, up 3.67% year-on-year, as it took advantage of relatively low hog prices earlier in the year.
But volumes were later constrained by the reduction in market supplies due to African swine fever and the softening in demand, it said.
Profits from fresh pork in the United States, where the group owns Smithfield Foods Inc, suffered from high hog prices, which were pushed up by expectations of strong demand from China, as well as by trade disruptions, it said.