Sunday, November 6, 2011

China as Pork Importer: The New Normal?

China's imports of pork have surged during the last few months, prompted by high domestic prices. China’s imports of pork and related products during January-September reached 870,000 mt, an increase of 44.6% from last year. Is China at a tipping point where it becomes a permanent pork importer?

An article last week in the Southern Daily reported the views of some industry analysts who are grappling with fundamental changes in China's pork industry. Some say imports of "foreign pork" could be a normal occurrence in coming years.

The consensus among analysts is that high prices reflect a shortage of pork in China, and "that shortage is very big," according to one prominent pork analyst, Feng Yuhui.

Analysts have observed that China's pork imports tend to surge during periods of high domestic prices. Imports spiked during 2008, the last time prices were at record-high levels, and fell off during 2010 when Chinese prices were low.

Analysts say this cycle may be different from the last one. This time, large numbers of small-scale "backyard" farmers have chosen to quit the industry in large numbers. There are multiple reasons cited. Although pork prices are high, feed costs are escalating, cutting into profits. Farmers are scared off by the risk posed by disease outbreaks. Moreover, the analysts cite the large number of other opportunities--farmers can find other jobs or business opportunities, so they are quitting hog production.

Meanwhile, large-scale hog production is increasing, but not fast enough to offset the loss of "backyard" producers. This time around Chinese hog producers are "more rational" and are not expanding as vigorously as they did in 2008. Feng Yuhui--the analyst--says that the still-short supply of sows is reflected in very high prices of young feeder pigs.

Wang reports that world pork trade now totals about 6 mmt. However, it would not be hard, he says, to expand trade to 8 mmt since farms in the U.S. and other countries have capacity to expand output.

Feng observes that U.S. hog producers have a cost advantage because the Chinese farms have to import expensive corn and soybeans. He estimates the U.S. cost advantage to be 1.5 yuan per jin (about 21 U.S. cents/lb).

China's pork imports come predominantly from the United States, but the article reports that a parade of merchants are coming to China looking for pork business. A Southern Rural News article reports that a Mexican delegation recently came to Beijing to meet with government groups on pork trade cooperation and China recently approved Mexican pork for import. Another delegation from Finland recently signed a protocol on pork quarantine and veterinary health.

Another analyst, Wang Xiaoyue, notes that large companies like COFCO and New Hope Group are entering the hog-production sector in a big way, but it will take some time for their new capacity to come on-line. In the meantime, he thinks China will have a pork supply deficit of 1-to-2 million metric tons annually until 2015 and imports of "foreign pork" to fill the deficit will be normal. However, these imports are not that big in the context of China's 50-million-metric-tons of annual pork consumption.
And he implies that after 2015 expansion by big Chinese companies will return the market to self-sufficiency.

An Academy of Social Sciences researcher, Li Guoyang, quoted in the Southern Rural News article notes the interchangeability of feed and meat imports. He thinks pork production could push China to import 10-to-20 mmt of corn, an eventuality that would threaten China's "grain security." Why not instead import that grain in the form of pork? He observes that importing pork would be less "sensitive" than importing large amounts of grain. With peoples' incomes and living standards rising, elasticity of demand decreasing, and pressure from rising costs and disease, he suggests that importing pork is important.

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