Sunday, August 8, 2010

Policy hogs vs market hogs

"Policy Hogs" vs. "Market Hogs": Confused Hog Cycle," which appeared on many hog industry websites Aug. 5, criticized the government's extensive policy intervention for displacing market forces as the driving factor in the hog industry.

The author notes that on one hand the government issued ten policy support measures that increased the supply of pork and put downward pressure on hog prices. On the other hand, the government has been buying up pork for reserves to alleviate the surplus created by its support policies. The author refers to the policies as counterproductive and sarcastically notes the result is that "both hands keep busy."

The industry has a 3-to-5-year cycle where farmers make money one year then lose for three. But, the article asserts, the support policies have broken the cycle. Instead of making decisions based on the hog-grain price ratio, investors have been attracted by subsidies. "Now there is no way for the market to eliminate a surplus." The author describes policies as "confusing the market cycle."

The author reveals some little-known problems with hog industry support programs.

A direct payment of 100 yuan per breedable sow was issued to farmers, but the funds were allocated based on numbers of sows reported up from the local level to the Ministry of Finance. According to a Henan official, the subsidy was stopped this year because the numbers are seriously inflated. A Ministry of Agriculture official told the reporter that subsidies were paid for 60 million sows in 2008 but there were actually only 40 million.

This blog reported several weeks ago on problems with sow insurance. The "policy hogs" article also reports that insurance companies are losing money on sow insurance because they are experiencing a high frequency of claims and high costs. An official with a meat company in Henan says that some small farmers file a claim on a dead hog, then lend the carcass to a neighbor so he can file a claim on the same hog.

In 2008, when the market was short of pork and prices were soaring, the Ministry of Commerce imported a large quantity of pork from the United States. The author says industry sources told him the imported pork was unsaleable because domestic prices had fallen by the time the pork arrived. The government pressured several companies to "eat" the losses by purchasing the pork at the original (high) price so the government would not have to bear a loss on the pork.

According to one company official quoted in the article, “The government should promote market openness and competition, nurture the industry’s healthy development, strengthen epidemic management, control hog resources, strengthen regulation of competition, and maintain food safety, but not blindly adjust the price.”

The article makes note of the vast amount of investment in China's pork industry from companies and investment banks--investors "coming to the pig pen to dig for gold."

Agfeed Inc. reportedly promised prospective U.S. investors in promotional materials, "Come invest in China's hog industry, make 90% returns!" Goldman Sachs' logic was that China has "the most mouths in the world and the most stomachs," therefore investments in Chinese food companies have to make money. The article cites several examples of investments in massive hog production projects by both foreign and domestic investors. The author says a real estate developer in Henan asked him for advice regarding how to invest in hog production.

The keen attention focused on China's food industry is a concern for Chinese officials. The soybean industry's reliance on imports and foreign investment is a precedent often cited in China as a negative example to be avoided. This article says officials are wary of foreign investment becoming dominant in the pork industry as well. (See earlier post, "Beware of American Pork!") The concern cited here is that the government lost its "guidance power" in the soybean industry. The government needs to have large domestic companies it can poke and prod to accomplish its policy goals.

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