Thursday, June 2, 2011

Pork: Sky-High and Underground

Pork prices have been climbing for months and accelerated in May. Pork prices are now 40%-45% higher than a year ago (when they were depressed) and are now near or at the historical high reached in 2008. Most reports indicate the high prices are due to short supplies--similar to the situation in 2007--and (also like 2007) there is no single factor creating the shortage. The surge in prices has its roots in 2010, but there are some indications that the March "lean meat powder" scandal has helped drive prices even higher.

An article from Shanxi Province says that the region has a short supply of hogs. According to interviews with hog-producing companies, the short supply can be traced back to a period of declining prices and serious losses during late 2009 and the first half of 2010 which induced many farms to sell their hogs and quit the business. In addition, the article cites the effects of "disease no. 5" (a euphemism for foot and mouth disease) which killed many sows last year. The article says sow inventories are now down 30%-40% from a year ago. The real impacts of this chain of events became evident in mid-March of this year.

An article from Nantong, in southern Jiangsu Province, tells a similar story of disease and depressed prices in 2010 from which "many farmers learned a lesson" and quit the industry. In Nantong, prices for various cuts of pork went up especially rapidly--10% to 12% during the month of May.

The Nantong story also draws a link to the "lean meat powder" incident. It cites the effect of regulations after the incident that reduced the number of hogs coming from outside the region as a reason for the rapid increase in pork prices. One of the revelations of the "lean meat powder" scandal was that hogs tainted with "lean meat powder" were being shipped to Jiangsu Province as inspectors either looked the other way or were fooled by truck drivers who submitted their own urine when pigs were tested for clenbuterol. One of the rectifications was to crack down on interregional shipments of hogs. A restriction on supply in Jiangsu means the price goes higher.

A very different angle appears in a story from Zhuhai in Guangdong Province (includes photos). From March 15 (the day the "lean meat powder" scandal became public) until early May, the Zhuhai meat association and a group of "volunteers" were checking the city's markets for pork from underground slaughterhouses. They found that half of the 335 meat counters in the city's 17 markets were selling illegal pork. They estimated that 500 illegally-slaughtered hogs end up on Zhuhai dinner tables each day.

Stories about underground butchers are common, but interestingly the Zhuhai story links an increase in underground slaughter to the tight supply of hogs following spring festival this year. The article says volume of slaughter at Zhuhai's four officially-designated slaughterhouses was down 18% this year. It blames rising prices and improper supervision for the "flood of underground slaughter."

This is one of three underground slaughterhouses near Fuzhou raided in May. Yuck! Like the Zhuhai crackdown, the Fuzhou raids were also organized by the city's legal designated slaughterhouses

Is tighter regulation pushing the pork trade underground? Are tighter inspections after the "lean meat powder" incident making farmers more fearful of getting caught, and therefore more inclined to sell to underground butchers? Can underground butchers bid more for hogs than designated slaughterhouses since they don't bother paying for inspections, licenses and the overhead of a big mechanized facility?

The leader of the underground butcher crackdown is the secretary of the Zhuhai meat association. I bet the secretary is also connected with the designated slaughterhouses. While this appears to be a food safety campaign, there are some clues that it is also an attempt to protect the monopoly of the designated slaughterhouses.

The secretary seems quite annoyed with the underground slaughterhouses. He complains that all four of the designated slaughterhouses operate at a loss. He points out that the official slaughterhouses have to pay inspection fees of 30 to 35 yuan per head. Still, he claims the underground slaughterhouses have higher costs. He estimates that higher labor and transportation cost, costs of pumping water into the pigs, and the risk of getting caught and penalized adds up to extra cost of 45 yuan per head for the underground butchers. "Where's the profit in that?" he asks with exasperation.

Despite the higher costs, the secretary says that underground pork is slightly cheaper, and many consumers like to buy it unknowingly.

While the "lean meat powder" scandal seemed to blow over without much problem (the slaughterhouse in Henan implicated in the incident just reopened and the chairman of Shuanghui is inviting consumers to come visit his factory), its effects may be more subtle but still significant.

A couple of lessons here...
It's virtually impossible to completely regulate and control markets in China. You can only do it by sharply curtailing liberty and handing out harsh punishments.
Regulating the pork industry entails higher cost and curtailing domestic supply.
Also, note that pork prices have shot up to where they were in 2008...wasn't the hog price alert frozen pork reserve program supposed to eliminate these fluctuations in prices?

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