China has largely escaped the crippling consumer inflation affecting other large economies, but it may begin to change as pork prices rise.
The government has embarked on a campaign to rein in the pork market, even as the higher costs of its staple meat threaten to breach inflation targets and complicate efforts to stimulate growth. Pork futures in Dalian have risen to a one-year high, while wholesale meat prices are at a six-month high.
Beijing has been trying to lower commodity prices for over a year as the pandemic and then the war in Ukraine caused a shortage of materials, from copper to coal. But the increase in pork appears to be the start of a well-established domestic cycle that usually lasts three to four years. Goldman Sachs Group Inc. estimates it could push consumer price growth above the central bank’s 3% target.
In a sign that authorities are worried, the nation’s foremost economic planner said he is studying the sale of pork from state reserves to prevent prices from rising too quickly. He asked pig farmers to maintain normal production and not to stockpile supplies. He is also working with the Dalian exchange to strengthen oversight of the spot and futures markets, according to a statement on Tuesday.
Officials have extensive experience trying to tame the pork market in recent years, after prices soared to all-time highs in 2019 in the wake of a nationwide outbreak of African swine fever, a deadly swine disease. . They can try to manage herd numbers directly with the ranchers, encourage banks to lend to ranchers, and release pork held in state reserves. However, they will work against powerful forces.
“The market always strengthens itself,” said Lin Guofa, head of research at the consulting firm Bric Agriculture Group. “When everyone believes that prices will rise, they tend to pile up and things can get out of control. But once expectations are reversed, prices can also drop deeper. “
The more expensive pork is an obvious drag on household budgets already strained by the Covid Zero government restrictions, which have hit the economy. In addition to this direct impact, staple food is the most important food component in the consumer price index, amplifying the effect of rising prices.
In May, pork prices in the CPI basket were still lower than they were a year ago. Without this, consumer prices would have increased by 2.4% instead of 2.1%, but that effect could reverse as prices continue to rise.
In a note last week, Goldman Sachs joined other economists in forecasting pork prices could push consumer price growth above the central bank’s 3% target in the second half of the year. , making it more difficult for the People’s Bank of China to continue easing policy without risking inflation out of control.
Just like any other commodity, the main driver of pork prices is supply and demand. The central issue is that the supply of piglets has been lacking after last year’s collapse in prices forced a larger-than-usual culling of sows.
The number of sows has declined from the end of the third quarter of last year to the end of March, and with rearing, gestation, birth and slaughter taking around 10 months, the lack of fresh meat is starting to become evident. This is especially true as the Chinese economy recovers after blockages in Shanghai and elsewhere forced consumers to hibernate.
Feed costs are another important factor in pig numbers and are currently a cause for concern. The relationship between pig prices and corn prices is a very careful indicator, with a lower number meaning that farmers make fewer profits on each animal and are therefore less willing to increase production.
The break-even point is where pork prices are about six times those of corn, a key feed ingredient, according to Citic Securities Co. But the ratio was lower for four consecutive months until April and reached its lowest level at least. in two years in March, when global crop prices skyrocketed. It remains to be seen whether recent increases in pig prices will cover rising feed costs and encourage farmers to increase the size of their herds.
The government has been trying to replenish its frozen pork reserves since March, when the below-normal feed ratio resulted in increased losses among farmers.
But as the market recovered, auctions have found it increasingly difficult to attract sellers. The government planned to buy 160,000 tons in June, but only managed to complete a small slice, suggesting that traders preferred to keep pork in anticipation of higher prices.
With rising feed costs, rising demand with restaurants reopening and destocking by pig farms over the past year, “the market is likely to actually support higher pig prices,” he said. said Even Pay, a Beijing-based analyst at consulting firm Trivium China.
Shares of major pig farmers have increased in recent days. Muyuan Foods Co. gained 3.1% in Shenzhen, extending the gain by 10% the day before. New Hope Liuhe Co. also grew for a fourth consecutive day, while Wen’s Foodstuff Group hit the record since September 2020.