August 27, 2012

Rising agriculture prices, caused by the present US drought crisis, are likely to affect China's pork prices and increase inflation over the next 12 months.

The dry spell in the Midwest has severely affected US grain and soy crops, which China depends on to feed its hogs.

"I would be very surprised if you don't see a flow-on impact to China pork and inflation" in the year ahead, said Sydney-based executive director of Macquarie Agricultural Funds Management, Tim Hornibrook.

Only 24% of the US corn crop and 29% of U.S. soy remain in good-to-excellent condition, with the stocks-to-use ratio--a measure of available supply--falling to 10% for corn, wheat and soy, Mr. Hornibrook said, citing USDA data.

"What that implies is that you have 72 days of supply on hand," he said. "Between 2003-2004 and 2012-2013, this only occurred three times."

China heavily relies on foreign soy for hog feed, and pork prices were already set to rebound in the fourth quarter due to tight hog supply. Brazil and Argentina may emerge as alternative large grain suppliers, especially of corn, he said.

China's consumer inflation eased to 1.8% in July from 2.2% in June, though some economists warn that inflation may rebound in the fourth quarter due to rising global agricultural prices.