Thursday, April 8, 2010

Ill-timed pork policies

Livestock industry news is all about widespread losses among hog producers. According to one article, right now a small farmer would lose 158 yuan raising a 110-kg hog.

The "hog cycle" is one of the best-known and most persistent economic phenomena in agriculture. Some of the sharpest economists have been working on ways to smooth out the hog cycle since the early part of the 20th century.

Since 2007, China has probably taken more measures to deal with the hog cycle than has ever been attempted, but Chinese officials have not been able to tame the cycle. They are now buying frozen pork for reserves and announcing that hog prices have stopped falling, but ill-timed subsidies in 2007-08 caused the industry to over-expand and create excess capacity.

From January to March of this year, hog prices plunged while feed prices have been creeping up. Consequently, the ratio of hog to grain price is now below the breakeven point of 6:1, and an article from Jiangsu says it's down to the "red line" of 5:1. Hog producers say they lose 150-200 yuan on every hog, so they're cutting back on inventories. Producers of feeder pigs are slaughtering some of their sows, which will make it hard for the industry to rebound if prices improve. Small-scale farmers are quitting, but those who have lots of cash are persevering through the downturn.

These conditions are similar to those that prevailed in 2006. Farmers were experiencing very low prices following a big build-up in hog inventories when avian flu induced many consumers to switch from poultry to pork in 2004. Many sows were slaughtered in 2006. When "blue ear" disease hit in 2007 with an already-tight supply, prices soared 50-70%.

The government panicked. They doubled the subsidy for sows from 50 yuan to 100 yuan per head, paid a "fine breed" subsidy, introduced sow insurance subsidies, waived income taxes for corporations entering hog farming, subsidized vaccinations, and made cash payments to major pork-supply counties. At the same time, high prices and profits attracted lots of investment in the hog sector.

Supply increased throughout late 2007 and 2008, and prices fell nearly as fast as they had risen. By May 2009, the hog-grain price ratio was down to the breakeven level and consumers were worried about eating pork as swine flu was on the rise. Prices recovered in the summer and fall and started dropping again at the end of 2009.

According to one article, here's what some pork producers are saying: "In 2007 and 2008, the government gave farmers subsidies, but last year and this year there were none." A local official said, after the state issued subsidies hog inventories clearly increased, so there were no subsidies given last year or this year.

THe official said prices are falling because supply exceeds demand. Some in the industry attribute the fall in prices to widespread disease which induces farmers to sell off hogs and causes buyers to lower their price given the high probability that the hogs they're buying are sick. Disease--another parallel with 2007.

Will there be another shortage of pork later this year, followed by another round of subsidies? The pork roller coaster never seems to stop.

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