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Hot hog sales raise spectre of inflation in China

August 28, 2012

SINGAPORE: Pigs are an unlikely barometer of inflationary pressure, but in China the country’s declining herds are a matter of concern amid fears that a spike in pork sales could drive consumer prices higher next year.

Faced with sluggish domestic demand and the record cost of fattening animals – due to a steep rise in the price of corn and soybeans as a drought grips top exporter the United States – China’s hog producers are being forced to sell their herds.

China’s food price cycle is driven in a large part by pork, the country’s staple meat, and while it is in abundance now, in about six months meat stocks are expected to fall as a result of the sell-off, resulting in a surge in prices.

Any increase in food prices is expected to push up inflation, which now sits at a comfortable level in Beijing having cooled from last year, but is still one of China’s biggest economic concerns given the potential for rising prices to trigger social unrest.

“If you look at corn and soymeal prices in China, the cost of feeding animals is already reaching a record,” said Jean-Yves Chow, a senior feed industry analyst at Rabobank in Hong Kong.

“We expect pork supplies to decline by early next year if profitability remains depressed, resulting in higher prices which will fuel food inflation.”

Worried by the state of the pig industry, China’s top economic planning agency this month ordered stockpiling of frozen pork in anticipation of a supply squeeze when consumption peaks during the Lunar New Year next February.

China holds reserves of pork, both in live animals and frozen meat, to help stabilise domestic prices during extreme price fluctuations. The stockpiling is also used to try to curtail food inflation and steady its domestic industry.

In 2007, rapidly rising pork prices became a national concern when China’s hog industry, responsible for producing 50 million metric tons, or half of the world’s pork, a year, suffered a deadly outbreak of blue ear disease.

Then, the resulting jump in pork prices drove food inflation sharply higher, the impact of which was most acutely felt in the poor rural areas, home to most of the country’s billion-strong population.

Rising global food prices fuelled by the US drought have so far had a limited impact on China’s consumer price inflation, which fell to a 30-month low in July. China’s food prices, which account for about 30% of the CPI basket, rose 2.4% in July from a year earlier, cooling from 3.8% in June as pork prices eased.

But as demand for pork weakens and China’s economy falters, some analysts say the impact on food prices may be limited.

“The overall economic situation is not sound,” said Wang Xiaoyue, an analyst with Beijing Orient Agri-business Consultant. “People dine less at restaurants and many plants have shut down, which is hurting pork demand.”

Feed costs surge

Responding to all-time high domestic meat prices, hog farmers had been busy rebuilding herds at the start of the year, but by the middle of the year the cost of feed had shot through the roof.

Corn and soybeans – key ingredients in animal feed – have climbed to all-time highs on the benchmark Chicago futures as the worst drought in 56 years devastates crops across the grain belt in the United States.

The price surge could not have come at a worse time for the livestock industry in China, which imports 60% of soybeans traded in the world and has emerged as the sixth biggest corn importer.

Small farmers, who account for about 30% of China’s pork production, have been the first to take a hit as they have struggled to meet rising feed costs.

“We are seeing depressed margins leading to hog and sow liquidation among the small producers in various parts of the country,” said Rabobank’s Chow. “It poses real risk to supplies and prices going into early next year.”

In 2007, China and Hong Kong imports surged due to the shortfall of domestic pork production after herds were decimated by blue ear disease. Among the beneficiaries were American farmers.

But US hog farmers are not expected to help meet the shortfall in China this time. US hog futures sank to their lowest in 1½ years last week amid worries that increased hog numbers would weigh as producers sell their hogs earlier than usual.

- Reuters


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