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Pork to Keep China's Inflation on the Back-burner

by 5m Editor
24 August 2009, at 12:21pm

CHINA - Pork, a trigger of past inflationary bouts in China, is likely to be a suppressant of price pressures in coming months and give the government leeway to keep monetary policy loose until the economic recovery is on solid ground.

A record flood of bank lending in the first half has fueled concerns that Chinese consumer price inflation, in negative territory since February, could soon accelerate - and accelerate quickly.

Monetary conditions are unquestionably crucial in determining the course of inflation, but recent history has shown that China's single most important price is that of pork.

Food makes up a third of the Chinese consumer price index and pork is the key component of that. A sweeping pig cull because of disease in 2007 sent pork prices soaring and sparked the country's worst inflation in more than a decade.

At first glance, pig market trends are unsettling, says Reuters.

Retail pork prices have risen for 11 weeks straight and are up more than 10 per cent during that time, which would seem to augur for an aggressive rebound of inflation in China.

But industry analysts and farmers said price rises would slow because an official pork stockpiling program and a general reluctance to slaughter hogs will leave the country with a bigger pig population than fundamental demand can support.

"There is no possible way that we will see pork-led inflation again because of the general over-supply of pigs," said Feng Yonghui, chief analyst for Soozhu.com, a hog industry website.

China needs about 410 million live hogs, including 41 million sows, for the market to be in equilibrium, according to the National Development and Reform Commission (NDRC), a central planning agency. Official data showed that China had 447.2 million live hogs and 48.3 million sows at the end of June.

US hog futures have plunged 34 per cent in three months and could be dragged lower by swelling supplies after a slump in export demand. China's pork prices have historically had little relationship to world prices, because it satisfies nearly all of its demand domestically and exports next to nothing.

In China, fresh pork cost 11.69 yuan ($1.70) per 500 grams in the week ending August 21, the NDRC said. That was 11 per cent higher than two months earlier, though still 20 per cent below the 2008 peak.

"Maybe the short-term price rises can last until September, but we do not expect pork prices will continue like that afterwards," said Guo Huiyong, an analyst who follows animal husbandry at Beijing Orient Agri-Business Consultant.

Low prices earlier this year meant that breeders were barely breaking even after soymeal-based feed costs rose, which might have discouraged them from raising more hogs. It takes six months to raise a hog for slaughter, so the ebb in prices could theoretically crimp the pork supply by the end of this year.