May 22, 2009
 
Stockpiling pork reserves - will the action strengthen China's hog markets?
 
With the best intentions, China government's contingency plan to stockpile pork reserves seems unlikely to support hog prices, and the livelihood of its farmers.
 
An eFeedLink Hot Topic
 
By SHI Tao with contributions from NGOH Seng Keong
 
 
Introduction: Sitting on the contingency plan
 
In response to forecasts of declining hog prices this year, six Chinese ministries, namely the National Development and Reform Commission, Ministry of Finance, Ministry of Agriculture, Ministry of Commerce, State Administration for Industry & Commerce and General Adminstration of Quality Supervision, Inspection and Qurantine, jointly put up a contingency plan January 9 to control the descend of hog prices and beef up the sector.

The first part of the contingency plan sets trigger mechanisms based on the hog-to-grains price ratio. The second part aims to keep the national hog and fertile sow inventories above 410 million heads and 41 million heads respectively so as to prevent over culling which will be detrimental to the industry in the long term.

While the central government listed the price ratios of various alert levels, each province was free to fine tune the ratios according to their respective needs. However, provincial governments showed little interest of putting together a specific plan for their hog markets. As of March 25 only seven provinces have announced their contingency plans.
 

Contingency plans of various provinces to support hog market

Province

First level alert
(red)

Second level alert (yellow)

Third level alert (blue)

Minimum hog inventory (million heads)

Minimum sow inventory (million heads)

Hebei

Hog-to-grains price ratio

Below 5.2:1

5.7:1-5.2:1

6:1-5.7:1

21

2.1

Regulation measures RMB100 subsidy for every sow and breeder boar Raise province's and designated cities' pork reserves; raise live hog reserves Raise province's pork reserves

Jiangxi

Hog-to-grains price ratio

Below 5:1

5.5:1-5:1

6:1-5.5:1

16

1.42

Regulation measures RMB100 subsidy for every sow Designated cities and areas to accumulate a minimum of seven days pork supply Designated cities and areas to accumulate a minimum of three days pork supply

Henan

Hog-to-grains price ratio

Below 6:1

6.5:1-6:1

7:1-6.5:1

45

4.5

Regulation measures RMB100 subsidy for every sow Provincial cities to accumulate a minimum of ten days pork supply Provincial cities to accumulate a minimum of seven days pork supply

Sichuan

Hog-to-grains price ratio

Below 5:1

5.5:1-5:1

6:1-5.5:1

55

5

Regulation measures Raise pork reserves of sub-level administrations and large-scale hog enterprises; Accumulate a minimum of ten days pork supply for city-level population Accumulate a minimum of seven days pork supply city-level population
RMB100 subsidy for every sow and breeder boar

Shaanxi

Hog-to-grains price ratio

Below 5:1

5.5:1-5:1

6:1-5.5:1

8

unstated

Regulation measures Increase province's temporary pork reserves; RMB100 subsidy for every sow and breeder boar Increase province's temporary pork reserves Establish province's temporary pork reserves

Hainan

Hog-to-grains price ratio

Below 5:1

5.5:1-5:1

6:1-5.5:1

4.35

0.62

Regulation measures Increase provincial reserves of live hogs; RMB100 subsidy for every sow and breeder boar Increase provincial reserves of live hogs Increase provincial reserves of live hogs

Shandong

Hog-to-grains price ratio

Below 5:1

5.5:1-5:1

6:1-5.5:1

26

2.6

Regulation measures RMB100 subsidy for every sow and breeder boar Designated cities to accumulate a minimum of ten days pork supply Raise province's pork reserves; designated cities to accumulate a minimum of seven days pork supply
Note: Measures will be taken when the hog-to-grains price ratio is in an alert level for four consecutive weeks
 
 
Although no official statistics were released by the provincial governments, eFeedLink's tracking shows that as of this writing, all major hog husbandry provinces are at least in the blue alert zone, being in their respective ratio ranges for four consecutive weeks (refer to graph above). Nevertheless, Sichuan is the only local government so far to push the button since China launched the contingency plan, starting to accumulate ten days of pork supply (code yellow regulation measure) May 13 in 16 of its cities.
 
 
Good plan…but who pays?
 
So, what is holding the local governments back in supporting the hog markets?
 
First and foremost, according to the central government's pilot plan, the central government will only be lending its helping hand when the hog First and foremost, according to the central government's pilot plan, the central government will only be lending its helping hand when the hog markets are in code red alert. For second and third level assistance, the funds will have to come from the local government's coffers.
 
The cost of preserving pork is not cheap. Preserving each tonne of frozen pork at an average cold storage life of four months adds up to around RMB1,779. Take for example Sichuan, which is now in its second-level alert zone, with a provincial population of 33 million people, ten days of pork supply amounts to 33,000 tonnes. Assuming the pork is stored for four months, Sichuan will have to spend about RMB100 million. However, as most provinces have built up their pork reserves since August 2007, Sichuan's government only needs to spend less than this amount to fulfill the reserves target of the contingency plan.
 
The additional cost of supporting the hog market is indubitably a burden to the provincial budgets, yet it is still within the capabilities of the most, if not all, local governments. One reason the local government has not taken any action to stockpile pork could be that some provinces already have enough pork reserves meeting the reserve targets of the yellow or blue alert measures. It is hard to verify this point as the country's pork reserves is a national secret in China. Perhaps, not even the central government can be sure of the amount of pork kept by the provinces as the local government could beef up the numbers - and they were often accused of such dishonesty.
 
On the other hand, from a practical point of view, the local governments would rather sit on their plans. As stated in the pilot contingency plan, the provincial government will be bearing the costs of the second and third level assistance to the hog markets and the central government will only come in when the market is in its red alert level. It is therefore to the benefits of the provincial governments to delay their actions till the big brother gets involved. An ugly scenario but makes sense nonetheless.
 
 
Or is it a good plan?
 
For some reasons, Sichuan is now willing to get its feet wet. But then, is it worth the plunge?
 
Cross province hog trade highly active in China: the higher price in one region will stimulate an influx of hogs and pork from neighbouring supply sources. Take the case of Sichuan, if the government were to procure 33,000 tonnes of pork, it will be equivalent to the slaughtering of 410,000 hogs or a mere three days transaction volume of its monthly 5 million hogs released. Should the procurements prove successful to uphold Sichuan's hog prices while other hog markets soften as expected, hog traders will swiftly transfer foreign hogs to Sichuan's market. To prevent the hog market from weakening due to the selling of cheaper foreign hogs, we estimate that the provincial government will have to throw in another RMB50 million to keep the prices afloat for those few days that it is stockpiling its reserves.
 
Therefore, unless the cross-province hog trade is curbed or all provinces act simultaneously to prop up their respective markets, the money invested with the goal of helping hog farmers will be siphoned off by traders. As an official from Sichuan's Department of Commerce confessed, with supplies exceeding demand substantially, it is hard to say if stocking the pork reserves will help to boost hog prices.
 
 
Back to square one
 
Why then, one may ask, does China not assist the hog farmers by giving subsidies directly to them?  For one, China is not in the practice of subsidizing its agriculture sectors directly but chooses to regulate the market prices of agricultural products when necessary. Furthermore, obtaining accurate or dependable statistics to guide its subsidies allocation is difficult because of the decentralized nature of the agriculture industry; and with the local governments manipulating the figures submitted, the statistics are but hypothetical numbers of no true value.
 
Hence, even with the best intentions, China government's contingency plan to stockpile pork reserves seems unlikely to support the hog prices and thus the livelihood of the hog farmers. That brings us back to square one: we believe that the market forces will still be the ones at work should hog prices stabilize or rebound- watch out for the invisible hand.
 


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