Fitch Ratings predicts that the reopening of China’s food-service sector following the Covid-19 pandemic will boost protein consumption in 2023. However, the credit profiles of domestic protein companies, particularly hog breeders, will depend on sustained cost improvements and market supply rationalization.

The rebound in catering services should drive the consumption of major proteins, with the food-services sector accounting for a significant portion of poultry and pork demand before the pandemic. This increased demand should lead to a recovery in hog prices and reduce breeders’ profit volatility, but the short- to medium-term hog price will still depend on market supply discipline and restocking sentiment.

Poultry prices had a positive trend in 2022 due to limited and rational supply, as well as a shift in consumers’ preference for poultry products given the high hog prices in 2020 and the first half of 2021. It is expected that the consumption recovery in 2023 will support poultry prices, but the price direction may differ based on the type of bird.

As a result of the consumption recovery, Chinese protein companies such as WH Group Limited’s Shuanghui operation and Wens Foodstuff Group Co., Ltd. are expected to benefit.

However, companies that have significant direct involvement in the breeding component of the value chain may have difficulties in increasing cash flow generation because of high grain costs and supply instability.