Economy, Talking Point

Making a pig’s ear of it

Why the Chinese government is so worried by rising pork prices

Making a pig’s ear of it

High pork diet: rapidly rising cost of the nation’s favourite meat is causing disquiet and fuelling inflation

“Swimmers told where they can eat safely,” ran the eye-catching headline in the Shanghai Daily.

The newspaper was reporting on efforts to stop foreign swim teams bringing their own pork to the 14th FINA World Championships in Shanghai.

Instead, the city’s Food and Drug Administration wanted them to rely on official advice on where they could eat out safely, i.e. without unwittingly ingesting clenbuterol.

As WiC has earlier reported (see issue 100), Chinese farmers routinely feed their pigs the additive clenbuterol to help keep them lean (and fetch a better price). This unscrupulous practice is a particular problem for athletes as clenbuterol is a banned substance. Get caught with it during a dope test and they face a two year ban (see WiC61 for the story of previous athletes claiming to have been undone by suspect sausages).

The risk looks real enough (a study released by an accredited lab of the World Anti-Doping Agency found that 22 of 28 travellers returning from China tested positive for clenbuterol) so Shanghai had to take action. Its solution: it has guaranteed that a designated group of restaurants will serve uncontaminated pork to foreign swimmers.

Ordinary Shanghainese will take little comfort from the special treatment for their visitors. But they have another, more pressing problem: the price of pork is soaring. In fact, it’s hard to pick up a Chinese newspaper and not see a headline on the subject.

The context…

In May the price of pork rose (year-on-year) 75% – going past its former high in 2008. There wasn’t much better news in June when it leapt again by 57% on the previous year.

By any standards, these are huge jumps, and have hit the wallets of local shoppers.

The Chinese are among the world’s top consumers of pork, reports the Financial Times, eating 37kg per person annually. And because pork is the nation’s favourite meat, its price has a major impact on consumer sentiment.

There aren’t many countries where the prime minister would comment on the cost of pork – but China is one of them. As ever, Premier Wen Jiabao was given the task of assuring the public of his determination to deal with events. “Stabilising the pork market is a responsibility the government must not shirk,” he pronounced solemnly last week.

There’s the link to inflation, too?

Yes, Wen will be more than aware of it.

The Chinese Academy of Social Sciences estimates that pork makes up a third of the food components of the CPI, or 10% of the CPI as a whole – making it one of the most influential constituents.

Food – and especially pork – is also a much more volatile component of the index. Compare the 57% price spike for pork in June to the more moderate year-over-year increase of 3% for non-food components. Taken together, these factors mean that some economists refer to the CPI as the ‘China Pig Index’, says the Wall Street Journal.

Why the recent price spike?

Regular readers of WiC will recall this isn’t the first time that prices have risen by an alarming percentage. Back in 2008 a similar thing happened.

In fact, Caijing magazine notes that there have been six occasions since 1985 when pork prices have risen by more than 10% (year-on-year), and three occasions when they have jumped by more than half.

There is a tendency to blame the price swings on diseases such as swine flu. But Caijing doesn’t think that explains why China’s pork industry is so dysfunctional. It cites Ministry of Agriculture statistics that show China’s hog stock mid-year at 453 million, which is marginally higher – by 0.8% – than 2010.

If supply hasn’t fallen, the price rises can only be explained by rising demand, Caijing suggests.

As China gets richer, it is eating more meat. According to Paul French and Matthew Crabbe, authors of Fat China, an account of the country’s increasing struggle with obesity, the average Chinese has doubled their intake of pork over the last five years.

Why is supply failing to keep up with demand?

Here much of the blame rests with the structure of the pork industry. China has 65 million pig farms but 40% of them slaughter less than 50 pigs a year i.e. they’re tiny.

“Foreign experience shows that when large scale farming accounts for 80% of the market, pork prices will stabilise and industry risks will be controlled,” Caijing reports.

The preponderance of small-scale farms instead leads to boom-and-bust cycles. When prices are low, smallholding farmers make losses and scale back on hog breeding (last year farmers were said to be losing Rmb500 on each pig sold).

But when prices are high, they get bank loans to build up their hoggeries – only to find a large increase in supply threatens to depress prices paid in the market.

The current situation is complicated by yet another destabilising factor: the price of feed. Even at higher prices the average pig farmer is struggling to profit on each animal he slaughters. Feed corn has risen to Rmb2.4 per kilogram, which is about Rmb0.5 higher than in the same period last year.

The Wall Street Journal reports that when the price of a pig is six times the price of corn, a farmer can break-even. Last year the ratio fell to a money-losing 4.76, which discouraged breeding, and by the start of the year – even after pork prices had risen – the ratio was still 6.6.

According to government data, the ratio has now improved to 8.5, which suggests that farmers are back into a better period commercially.

“That is above the level required for farmers to break-even,” admits the Journal, “but probably not high enough to turn sleeping boars into feisty Casanovas. By way of comparison, at the beginning of 2008 the ratio that had farmers piping old-time love songs into the sty was above 10.”

All told, this suggests supply will continue to lag demand – keeping inflation high.

What is the government’s response?

To retreat to the bacon bunker. Last Thursday it released some meat from its strategic reserve, ostensibly to halt the rise in pork prices. But the move was largely symbolic. The 200,000 metric tonnes that will arrive at market represents just 0.4% of annual pork consumption.

China’s pork reserve – created four years ago – is evidently still not big enough to stabilise the market. The Chinese Academy of Social Sciences estimates the strategic reserve of pork at just 300,000 metric tonnes, offering little in the way of cushion.

Other new measures are being designed to deal with the industry’s structural weaknesses, especially the Rmb2.5 billion spend on a programme to encourage the growth of larger scale farms. Ultimately this is the real solution, but it won’t happen fast. In the meantime a subsidy of Rmb100 per sow has been promised, to counter feed costs and encourage the smaller farms to breed more pigs.

Not everyone is pleased by the government’s intervention. Ren Zhiqiang, a real estate boss (and one of China’s most-read bloggers), wrote on his weibo: “Throughout Chinese history pig farmers never required government guidance. Don’t today’s farmers know how to raise pigs? Do they have to depend on government coordination?”

But one likely beneficiary of the situation is the US. China is projected to exceed its previous 2008 record of 112,963 metric tonnes of American pork imports by year end.

Hogging the headlines?

Alongside the wider industry news, there have also been rumours of malpractice at two of the country’s largest pork suppliers.

In late June, China Yurun Food lost $2 billion of market value on speculation that Muddy Waters, a shortseller, would soon accuse it of overstating its pig stocks.

Carson Block, head of Muddy Waters, then denied the claims. “I had never even heard of China Yurun,” he said. “Somebody obviously used our name.”

Yurun recovered some of its poise last week when major shareholder Zhu Yicai bought 8.5 million shares. He reaffirmed that profits were up in the first six months, largely thanks to rising prices.

Then this week China Economic Review took aim at another pork firm, Nasdaq-listed Zhongpin Inc, with the claim that its supply chain could not have supported the sales being reported. This saw the stock plunge 23%.

Zhongpin says the analysis is faulty and will respond to the claims on an investor call today – offering greater details of its suppliers. But the case adds another twist to the pork supply numbers. Given that two of the biggest four pork firms in China have had to reiterate that their figures are accurate, it shows how sceptical the market has become that the country is producing as much pork as it needs.

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