Monday, January 19, 2009

China to Iron Out Hog Price Cycle?

The Chinese government has announced a new system for monitoring hog prices that specifies criteria for intervening in markets when prices fall below specified thresholds. They have a list of price indicators that they plan to monitor and manipulate through market interventions. Can China engineer its way out of the hog cycle?

On January 9, 2009, the National Development and Reform Commission and Ministries of Finance, Agriculture, Commerce, Commercial Bureau, and AQSIQ jointly issued a document that announces China’s intention to iron out fluctuations in hog prices. The document affirms the leading role of market forces but with government control.

The new system identifies a list of indicators that the government will watch to assess the state of the hog market. Indicators include live hog, grain, pork, feeder pig prices and hog inventories. The system aims at maintaining specified ratios between prices and minimum inventories of hogs.

The chief indicator is the ratio of hog price to grain price which should go no lower than 5.5:1. The ratio of feeder pig to wholesale pork price cannot go lower than 0.7:1, hog inventories cannot go lower than 410 million and the inventories of breeding sows cannot go below 41 million.

The market situation is designated according to different colors according to the hog-grain price ratio from “green” to “red”. The “normal” range is specified as 6:1 to 9:1. When the ratio goes below 6:1, increasingly active measures are specified for ratios in specified ranges, that include purchasing pork for central and local frozen pork reserves, adding to local live hog reserves, subsidizing processing companies to purchase pork, giving subsidies of 100 yuan per breeding sow, and managing foreign trade by “limiting” imports, “perfecting” the food safety system, and supporting pork exports.

The document emphasizes that statistical indicators will be issued on government web sites to make producers aware of market and disease risks. We’ll see. The Dim Sums blog has been monitoring various ag prices and other indicators like these and they come and go.

Give China’s technocrats credit for getting away from specifying price levels, instead looking at relationships among prices. It’s not likely that government interventions can stop prices from fluctuating. In 2007, the government intervened when prices were “too high.” A year later prices were “too low” and it was time for another round of interventions. Markets are too complex for any government to monitor and control.

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