February 17, 2010
 
Farmers, city dwellers and the price of China's pork
 
Compared to the hyperinflation of three years ago, China's hog market looks balanced, tranquil. Nothing could be further from the truth.
 
An eFeedLink Hot Topic
 
by Eric J. BROOKS

 
Thirty years ago when China first liberalised its economy, raising feed and meat output was easy: Higher prices encourage more production. They just let the market set prices and China's farmers took care of everything else. Since 80% of China's people lived in the countryside, most people did not mind if the price of meat went up.
 
In a rural majority country, the higher profits on the grains they grew and animals they raised more than made up for the higher food costs of city dwellers, who were then a demographic minority. Times have changed and the political tension between China's farmers and city dwellers can be seen in its market for pork.
 
 
Falling inventory, rising demand & sagging prices?
 
The country's swine sector, while appearing outwardly peaceful, has a calm that is only held together by government intervention. Across all levels of the feed-to-pork supply chain, interventionist policies, while keeping market peace, are often self-contradictory and ultimately, unsustainable. Here, we examine the implications for a national hog sector that single-handedly accounts for over half of the world's swine population.
 
In the present situation, inventories have steadily declined for over 18 months. The situation is such that despite having added 100 million people and lots of per capita consumer spending power, over the last five years, hog numbers, once near 500 million, are about to drop below 400 million. 
 
Curiously however, the accompanying graphs will show you that for the better part of the past year, hog replenishments exceeded releases, by an average of approximately 5%, yet inventories fell. Better yet, the economy recovered, pork consumption grew handsomely, swine numbers fell -and prices fell! Several factors are behind this apparent, economically unviable anomaly.
 
 
Diseases, mycotoxins, sow sterility hold back supplies
 
First, swine diseases are a much bigger problem in China than in other large hog producers. When one adds disease mortality to the release rate, the result has been negative hog inventory changes for more than a year.
 
High disease mortality rates imply that sows need to have extra litter to replace those that died prematurely. Instead, here too, we find a serious complication that cannot be undone by government subsidies to encourage sow ownership and vaccinations: mycotoxins, particularly those which contaminate much of the domestic corn supply.
 
These mycotoxins hold back China's hog population in two very subtle, yet powerful ways. First, many mycotoxins, although not outwardly harming hogs, profoundly compromise swine immune systems. This is as great a factor in the high swine disease mortality rates as poor swine housing conditions, poor feed nutrient quality or the unusually cold weather of the last two winters.
 
Second, many mycotoxins either render sows sterile or leave their weakened immune systems open to diseases which impair their reproductive capacity. This means that after mycotoxins keep many hogs from reaching market, they also ensure that sows cannot easily replace them. This is one reason why piglet prices went up at a time when swine and pork prices kept falling.
 
Finally, the mycotoxins then interact synergistically with pre-existing problem. At many of the smaller scale or backyard hog farms, the health-compromising effects of mycotoxins are then compounded by poor hog housing conditions or low sanitation standards.
 
Indeed, even when it appears to be profitable to expand swine herds, the specter or losses to diseases forces farmers to take a conservative approach. In this month's eFeedLink China Hog Market report, analyst Shi Tao states, "Piglet replenishment was exceptionally low then, as sow reproduction ability was harmed by widespread swine fever outbreaks. Moreover, hog farmers were reluctant to expand inventories as winter approached."
 
Perhaps the most challenging part of being a hog farmer in China is coping with the stifling of market forces. That is, left on its own, despite the problems with disease mortality, China's hog market would push prices up to a point where supply would increase and demand fall off until the two were balanced. Despite all outward appearances, this is not being allowed to happen.
 
For example, with the hog population in decline, meat consumption rising again and Chinese New Year coming up, hog prices should rise -as they almost always have prior to New Year. The higher prices would then serve as an incentive to reverse the decline in swine inventories.
 
 
Government intervention impedes market functioning
 
What happened this year? Demand certainly picked up but regional governments throughout China flooded the market with frozen pork. Originally designed to meet demand during emergency shortage situations, the huge releases of pork were instead done to curry favour with urban residents, who prefer that their pork be as inexpensive as possible.
 
This move is popular in large cities but it deeply cuts into the profit margins of hog farmers at a time of year when they usually make a large proportion of their annual profits. Going forward, this will make chastised farmers reluctant to replenish their swine inventories, ensuring that hog populations stagnate even as population and per capita consumption keeps rising.
 
Naturally, this means that sooner or later, shortages avoided by dumping pork on to the market will reappear. At first, it will be possible to control prices by dumping ever larger quantities of frozen pork on the market, which will make farmers even more reluctant to raise their hog inventories. Eventually, that could make pork shortages and price inflation appear, perhaps worse than the first time.
 
While the government can again sell more frozen pork, this will depress swine production further, making the problem worse. Eventually, governments will run short of frozen pork and farmers will lose the incentive to grow the necessary number of hogs.
 
At that point, either domestic prices must skyrocket, or the country becomes dependent on pork imported from Brazil or some other large producer.
 
All this sounds as if the solution is to merely stop using frozen pork to control prices and start using more toxin-binders to control mycotoxins and clean up hog pens. Actually, the problems go deeper down the supply chain: China's pork market is as hobbled by controls on costs as it is by the manipulation of selling prices.
 
 
Corn market hobbles swine sector
 
Should swine prices be allowed to float freely, that would help guarantee consumers adequate pork supplies and farmers a good rate of return. It would not however, guarantee sufficient feed supplies. Through grain reserve auctions, the price of corn is strictly controlled, lest it inflate the cost of making pork and other meats.
 
While this keeps pork prices low and helps hog producers maintain adequate profits with a lower selling price, controlling corn prices also discourages the planting of corn in a country that is growing chronically short of this vital feed material.
 
On one hand, if the government continues to control the price of corn via state grain reserve sales, it destroys part of the incentive for growing corn. This may, over time, set up hog producers for a shortage of corn feed.
 
There are only two ways out of the corn supply dilemma: Either let the price of corn rise much higher, which would encourage the conservation of this coarse grain. That of course, would raise swine production costs and therefore, pork prices. The only other alternative is mass corn imports. This would help keep swine production costs under control but result in dangerous feed grain dependence.
 
At this time, with government market intervention destroying the incentive to raise more pigs and corn, the situation is becoming increasingly problematic. For now, state corn reserve releases will control swine production costs. For some time longer, frozen pork releases will keep pork cheap during Chinese New Year.
 
Over time however, these actions undermine China's capacity to raise hogs, or to grow enough corn to feed them. By then, reserves of both corn and pork will be very low.
 
With the majority of Chinese now living in cities for the first time in history, the political pressure to keep the cost of pork low grows with every year. With artificially low pork costs making demand grow disproportionately fast in the face of falling hog numbers, sooner or later, something has to give. Eventually the market, like nature itself, cannot be defied.
 


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