UPDATE 2-China's hog futures, company stocks rally on disease outbreaks

(Adds details and comments on stock market)

BEIJING, Feb 8 (Reuters) - China’s most-active hog futures contract surged more than 4% on Monday and shares of the country’s biggest pig producer rallied after recent reports highlighted severe disease outbreaks in the world’s largest pig herd.

The reports fuelled investor concerns about pig supply and bets that prices will rise.

The hog futures contract closed 4.08% firmer at 26,900 yuan ($4,166.15) per tonne, its highest since trading on the Dalian Commodity Exchange launched last month.

Shares in the country’s top pig breeder Muyuan Foods surged 9.3% on Monday to 116 yuan.

Both futures and company stocks began to rally last week, amid intense discussion around the extent of disease in the country’s hog herd.

Reuters reported last month that new strains of African swine fever were affecting production on breeding farms in China.

“Recently a lot of experts have come out to talk about it,” said a senior futures analyst who declined to be identified. That has triggered a shift in investor sentiment that had initially been bearish on hog futures when the contract launched on Jan. 8 on expectations of recovering supply.

The turnaround is comparable with early 2019, when the market began to understand how serious swine fever was, fuelling a stock market rally, said Xiao Lin, analyst at Shenzhen-based investment fund Win & Fun Investment.

“Both the winter of 2018 and winter of 2020 saw relatively large reductions in capacity. Once people understand the situation, they start to buy stocks,” she said.

Industry participants and analysts also told Reuters this month that outbreaks of other disease are hurting output this year.

The government has so far not confirmed the reports. It did not respond to Reuters’ request for comment on Monday.

Beijing reports little data on disease outbreaks on Chinese farms but several analysts have in recent days pointed to significant impact to China’s breeding herd.

The analyst views undermine an official forecast for the pig herd to fully recover in the first half of 2021 from a devastating epidemic of African swine fever that began in 2018.

“The damage caused by the epidemic this winter was much more serious than last year,” said Cofco Futures analyst Xiong Kuan in a report issued Sunday.

Swine fever wiped out about half of China’s herd in 2019, a year after it reached the country, pushing pork prices to record high levels and fuelling the highest consumer inflation in years.

Despite huge investment in rebuilding the herd since then, a surge in disease during the winter will set back efforts to bring down pork prices.

Xiong estimated 20% of sows in northern China have been impacted by swine fever in recent months and up to 30% in some parts of the south.

Hua’an Futures cited data by Yongyi Consulting in a note on Sunday showing that stocks of breeding sows had declined in December 2020 and January 2021 by 1.68% and 4.99% respectively and were 37% lower than before swine fever emerged.

High piglet prices, which are close to 1,600 yuan for a 7-kilogramme pig, point to a large loss of piglets, Xiong said in a report on Monday.

A lower piglet supply, in addition to high feed costs, will raise the cost of producing finished hogs, boosting integrated players such as Muyuan, analysts said.

“China will slaughter 529 million pigs in 2021, an increase of only 0.4% year-on-year, and pig prices are expected to remain high,” said Hua’an analyst Wang Ying on Monday.

Xiao, the investment fund analyst, has revised her forecast average hog prices this year to 28 yuan from 25 yuan.

$1 = 6.4568 Chinese yuan Reporting by Dominique Patton; Editing by Ana Nicolaci da Costa, Susan Fenton and Sherry Jacob-Phillips