August 30, 2012

China faces higher inflation due to rising pork prices

China is expected to face a higher level of inflation in 2013, due to rising pork prices amid declining domestic supply. 

The nation's top economic planning agency is ordering producers to stockpile its frozen pork supply ahead of a possible supply squeeze.

Pork, the country's staple meat, traditionally dictates most of China's food price cycle, the report noted; and any increase in its price as such, would push up inflation in the country, it said.

"We expect pork supplies (in China) to decline by early next year if profitability remains depressed, resulting in higher prices which will fuel food inflation," said Jean-Yves Chow, a senior feed industry analyst at Rabobank in Hong Kong.

"We are seeing depressed margins leading to hog and sow liquidation among the small producers in various parts of the country…it poses real risk to supplies and prices going into early next year," he said.

As such, on August 7, China's National Development and Reform Commission (NDRC) said that it would increase state purchases of frozen pork from the domestic market in order to stabilise live hog prices and maintain profitability for pig farmers.

This came after Chinese hog producers were also forced to sell their herds after the US drought led to a steep rise in corn and soy.

"If you look at corn and soy prices in China, the cost of feeding animals is already reaching a record," noted Chow.

Additionally, the Chinese are also hoping to avoid a repeat of 2007, when a deadly outbreak of blue ear disease saw China's pork production fall significantly, leading to higher food prices and domestic unrest.