Pork to keep China's inflation in check

Pork, a trigger of previous inflationary bouts in China, is likely to lend its weight to suppress price pressures in the coming months and give the government leeway to keep monetary policy loose until the economy starts to recover.

The swell in bank lending in the first half of the year has fuelled concerns that Chinese consumer price inflation, which was in negative territory since February, could soon accelerate quickly. Even though monetary conditions are important in determining the course of inflation, recent history has shown that China's single most important price is that of pork.

 

Food constitutes a third of the Chinese consumer price index and pork is a critical element of that. In 2007, a massive pig culling was carried out in China due to the spread of blue-ear disease, resulting in soaring pork prices and sparked the country's worst inflation in more than a decade.

 

At first sight, the current pig market trends are unsettling.

 

The retail pork prices have risen for 11 consecutive weeks and are up more than 10 percent during that period, which would seem to bode well for an aggressive rebound of inflation in China.

 

However, industry analysts and farmers said the price hike would slow down due to the Chinese government's pork stockpiling programme and a general reluctance to slaughter hogs will saddle the country with a bigger pig population than the fundamental demand can support.

 

According to the National Development and Reform Commission (NDRC), China needs about 410 million live hogs, including 41 million sows, for the market to be in equilibrium. Official data showed that China had 447.2 million live hogs and 48.3 million sows at the end of June.

 

Meanwhile, US hog futures fell 34 percent in three months and they could drop lower as supplies began to swell following a slump in export demand. Fortunately, China's pork prices historically had little relationship to world prices as it satisfies almost all of its domestic demand and exports next to nothing.

 

In China, fresh pork cost RMB11.69 (US$1.71) per 500 grams in the week ending August 21, the NDRC said. That was 11 percent higher than two months earlier but it was still 20 percent below the 2008 peak.

 

Low prices earlier this year meant that breeders were barely breaking even after the rise in soymeal-based feed costs, which might have discouraged them from raising more hogs. As it requires six months to raise a hog for slaughter, the decline in prices could theoretically crimp the pork supply by the end of this year.

 

Last month, China's central bank said the consumer price index, which fell 1.8 percent in the year to July, would start rising in the fourth quarter. Thus, the pork supply shortage could hit just as broader price pressures build up.

 

This could force the central bank into raising interest rates prematurely. With signs indicating that the economy's momentum has slowed down in recent weeks, most analysts think Beijing wants to keep the loose monetary policy into next year.

 

However, the government was well aware of the 2007 pork-led inflation instance and it aimed to ease the rising pork prices with a stockpiling programme. Its initial purchase of 120,000 tonnes of pork, while insignificant next to China's annual output of more than 40 million tonnes, was sufficient to cap the increasing price and to encourage hog replenishing, even though it was not justified by real demand.

 

Another factor that ensures the ample hog supply is the basic reluctance of farmers to reduce their inventories. Many regretted the huge cull in 2007 as the subsequent pork shortages led prices to increase by 50 percent.

 

Nonetheless, officials are confident that the price increments will be capped.

 

The Shanxi statistics bureau concluded that the rise in live hog stocking would limit the scope for price increases, after conducting a survey of 182 large pig farms and 166 rural households.

 

Meanwhile, following a survey of 37 pig-producing counties, Hunan statistics bureau forecasted that live hog prices would hover in the range of RMB10-11/kg for the rest of the year, about the same level as the current prices.