November 11, 2011


Decline in China pork prices aligns with Goldman's prediction



A fall in China pork prices derived from US soy futures has fulfilled Goldman Sach's prediction.


However, the price fall is unlikely to pick up due to a solid demand for the meat and soaring hog values, says meat group Zhongpin.


China's annual inflation rate slid to 5.5% last month from 6.1% in September, in part thanks to a pullback in the rate of increase in pork prices from levels above 50% earlier in the year.


Annual pork price inflation eased to 39% from 44% in September, with prices actually declining by 6.4% since mid-September, according to China's Ministry of Commerce.


However, the slide looks unlikely to gain legs, with pork values underpinned by hog prices which, for China-based Zhongpin, averaged 60% more in the July-to-September quarter than a year before, and which the company forecast would "remain stable" for the rest of the year.


Prices of pork itself "are expected to remain relatively high for the rest of 2011, assuming steady economic growth and the forecast for the supply of and the cost to raise hogs", said Warren Wang, Zhongpin finance director.


"China's economy continues to expand and pork continues to be China's preferred protein." Indeed, the Chinese New Year celebrations in late January and early February, a time of particular pork consumption, may revive sector inflation early next year.


Zhongpin forecast that hog prices would "increase moderately during the first quarter of 2012 due to the strong demand for pork during the Chinese new year".


The comments came as Zhongpin, which is listed in New York, unveiled earnings up 25% at US$18.3million equivalent to US$0.46 a share, in the July-to-September period, on revenues up 65% to US$398.1million.


The rate of earnings growth, while just ahead of Wall Street expectations, was held back in part by Zhongpin narrowly failing to keep its pork prices rising in line with the cost of hogs lifted by short supplies and rising feed bills.


The slip back in Chinese inflation also appears to fulfil a forecast from Goldman Sachs following September's collapse in prices of US agricultural commodity futures, and in particular those of soy, of which China is the top importer, to provide feed for its huge hog herd.


"The recent collapse in soy prices will potentially have a beneficial impact on Chinese food inflation, which represents close to a third of the Chinese consumer price inflation," Goldman analyst Damien Courvalin said on September 30.


"China has to import soy at Chicago prices, generating a strong dependency between local food prices and Chicago soy prices," he said, noting a "remarkably strong correlation" between Chinese food prices and Chicago soy prices, in Renminbi terms.

"Should this relationship continue to hold, the recent collapse in soy prices and our expectation for continued lower prices suggests that Chinese food inflation could ease soon."

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