How We'll Make a Fortune Exporting Pork to China

"I eat sausage in the morning, a meat dish and a vegetable dish for lunch and the same for dinner. If there's no meat, I won't feel full."

That's from the mouth of 20-year-old college sophomore Guo Meng as she chows down at a local McDonald's.

"It was impossible for my parents' generation to have meat all the time," adds Xue Wei, a 42-year-old teacher. "Now we can eat meat every day."

Since 1980, per-capita meat consumption in China has nearly tripled. The price of pork has jumped more than 50% in one year, yet the butcher shops remain packed.

In fact, there's so much money to be made in the Chinese meat trade that 26-year-old Zhou Jian recently switched from selling car parts to pork – and is now making three times more money.

The Chinese eat more pork than the rest of the world combined. The country consumes seven times as much as the No. 2 consumer, the United States. And consumption is increasing. According to the USDA, Chinese pork consumption rose 22% between 2002 and 2006.

In 2007, a shortage of pork hit China. The earthquake, huge snowfalls, and an outbreak of swine disease have resulted in a 9% decline in Chinese pork production. Chinese pork prices rose 68% between April 2007 and April 2008.

The disease problem in China is going to get worse. Peasant farmers account for 70% of hog production in China. As peasant farmers move to the cities for manufacturing jobs, it's putting pressure on supplies. So the government is setting up factory farms like they use in the United States. But with China's polluted water and overcrowding in the hog sheds, disease will spread even more readily than it already does...

"I am very skeptical of these modern facilities that are being built today [in China]," says Nick Rosa, a Chinese hog-industry expert speaking at JPMorgan. "What typically happens in a hog farm, when they have a brand new facility, with the first cycle, the mortality rate is 5%. But then each progressive cycle as disease starts building up, it goes from 5%, 10%, 15%, 20%, and before you know it, you have a big problem, and that is what I am predicting is going to happen in China."

Meanwhile, there's a glut of pork in North America. The situation is so bad in Canada, the Canadian government is giving Canadian hog farmers money to kill their pigs.

The Canadian Pork Council is giving hog farmers C$225 for every breeding pig they "cull." The funds help farmers cover the costs of transport, euthanasia, and disposal. To qualify for the money, hog farmers must agree to "depopulate" an entire breeding barn and promise not to house more hogs in the same barn for three years.

As of two weeks ago, the Canadian Pork Council had received 500 applications.

In the U.S., hog prices are so low, farmers are killing their piglets and using them as compost.

I think there's a big opportunity for America and Canada to export pork to China. As one hog-industry observer put it, "The potential for further Chinese importation of pork is almost incomprehensible." Chinese pork imports are already up 311% from last year.

My favorite way of playing this is to buy American and Canadian meatpacking companies that do business with China... As China's shortage grows more severe and hog prices recover in the U.S., these firms will make fortunes.

Good investing,

Tom