Thursday, July 14, 2011

Pork Policy Deja Vu

Last month, the Ministry of Agriculture announced a set of pork industry policies that the dim sums blog observed were much more restrained than the aggressive policies announced in 2007, a time of similar soaring pork prices. We thought perhaps the government learned from their mistakes last time around when 2007 hog stimulus policies ended up driving the industry into severe losses by 2009. Dimsums was wrong.

Politicians--whether Democrats, Republicans, or Communists--have to "do something" about every problem. So, on July 12, Premier Wen Jiabao chaired a state council meeting where another set of hog stimulus policies were announced. I count 13 policy measures. The policies are quite similar to those announced in 2007. In fact, most are already in place. The subsidy for sows has been revived. There is a preoccupation with disease problems and protecting students from rising prices.

The policies include:
1. Subsidies for building commercial-scale hog farms totaling 2.5 billion yuan that may be increased in the future as needed. This is an expansion of an existing subsidy.
2. A 100-yuan per head subsidy to farmers for breedable sows. This subsidy was introduced in 2006 at 50 yuan, expanded to 100 yuan and seemed to disappear in the last couple of years.
3. Continuing the subsidy for sow insurance. This has been in place since 2007.
4. Support breeding farm construction, increasing the capability of supplying frozen semen. This policy has been around for a number of years and artificial insemination has been promoted heavily over the last couple of years.
5. The number of counties receiving financial "award" grants as pork-supplying counties will be increased from 421 to 500. This policy was introduced in 2007 and the number of counties has grown each year.
6. Implement the animal immunization policy (free vaccinations for foot and mouth, blue ear disease, and swine fever). This has been around at least since 2007.
7. Give aid of 80 yuan per head for safe disposal of pigs that die of disease. This is an existing policy; 80 yuan is not enough to convince farmers to bury dead pigs instead of selling them illegally to butchers.
8. Slaughterhouses will get subsidies of 500 to 600 yuan per head as compensation for disease losses. This is new and may be enough to induce slaughterhouses to reduce the number of sick pigs they butcher.
9. The subsidy for grassroots animal disease prevention personnel is raised from 1000 to 1200 yuan [per month?]. Presumably, this is supposed to induce inspectors/veterinarians to actually do their jobs or stop taking bribes, but looks like still a feeble amount.
10. Increase credit support for commercial-size hog farms and give them loan guarantees. Investigate setting up joint loan guarantees for hog farm enterprises.
11. Strengthen statistics on "vegetable basket" commodity production, distribution and consumption, conduct monitoring and analysis to assess the production situation and changes in the market.
The rest of the policies are subsidies to help poor families bear the rising cost of food.
12. Each locality is to set up a mechanism for linking price subsidies to rising commodity prices.
13. Implement aid policies for students from poor families, strengthen the management of dining halls, ensure that students' standard of living in the fall semester is not affected by rising commodity prices.

Of course, these policies are not going to increase the supply of pork any time soon. It takes about a year to get a new litter of pigs and raise them to market weight. Farmers were already trying desperately to expand their herds. Piglet prices rose far faster than pork prices in recent months, an indicator that farmers are trying to expand but the supply of sows and piglets is limited.

The policies actually could increase pork prices in the short term.

First, the policies push the industry from small-scale to medium- and large-scale farms which have a higher cost structure. Feed rations are shifting from locally-abundant food scraps, crop stalks, vines, brans, etc used by small farmers to grain-based rations used by commercial producers. This is a factor increasing the demand for corn beyond its domestic availability, pushing corn prices up and boosting the cost of feed. That puts a higher floor under pork prices. Large farms have high overhead costs too.

Second, if compensation for disposing of dead pigs works, dead pigs will actually be buried instead of butchered. Long-time readers of this blog will be familiar with the widespread slaughter and sale of diseased hogs. If diseased pork is actually removed from the market, the supply of pork will be restricted and prices will go up.

Another factor not mentioned is stricter enforcement of pharmaceutical use following the "lean meat powder" episode in March. Surely this is restricting the supply of pork. There are some anecdotes about tainted hogs being slaughtered.

The slew of policies introduced in 2007 led to a big surge of investment in the hog industry which in turn led to a big expansion of supply and plummeting prices in 2008 and 2009. It's hard to imagine the policies doing this again. We can look for declining pork prices next year, but the rising cost structure means pork prices can't go down that far before farms start losing money.

That means Chinese people can plan on permanently higher pork prices...unless barriers to imported pork are lowered.

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