The National Bureau of Statistics report on China's economic indicators for first quarter 2015 reveals a tension between inflationary wage pressure and policy support of grain prices against broader downward pressure on prices.
The NBS report says that "Primary Sector" GDP--mainly agriculture--was up 3.2 percent in Q1 2015. That's about 1 percentage point slower than its customary 4-to-5-percent growth rate in recent years. It's also less than half the 7 percent growth rate for all GDP, an indicator that agriculture's share of the economy continues to decline as China's overall economic growth downshifts.
Another telling indicator buried in the tables in the Chinese version of the report is a 3.6 percent decline in the number of rural migrant workers during Q1 2015. This has to be the first decline since they started reporting this statistic. The declining number of migrant workers is an indicator that there are fewer construction sites and that factories are scaling back operations.
Yet, there is still substantial inflationary pressure in the Chinese economy. The average monthly wage of migrant workers (3000 yuan/month) was up 11.9 percent in Q1 2015 compared to a year earlier. That was over 10 percentage points faster than the 1.2-percent growth in the consumer price index. This is not as rapid as wage growth which topped out at over 20 percent several years ago, but is still a big increase--especially for an economy in downshift mode. Why would real wages be growing so fast in a downshifting economy?
The downshift is evident in the shrinking pork sector. Overall meat output was reported down 1.4 percent for Q1 2015. Pork constituted two-thirds of meat production, and pork output was down 3.1 percent. The number of hogs slaughtered was down 3.7 percent.
The number of hogs has been shrinking continually since last year but the Ministry of Agriculture and National Bureau of Statistics are reporting numbers of very different magnitude. The NBS Q1 2015 report said China had 453.5 million hogs and the number was down 4.2 percent from a year ago. The MOA reported that the March 2015 hog inventory was down 10.7 percent from a year ago (MOA stopped publishing an actual inventory number three years ago). The NBS number seems more plausible, but probably neither number is very accurate in view of the entry of new large-scale farms and exit of backyard operations that makes it impossible for statisticians to count 450 million pigs on a monthly basis. What we do know is that there are a lot fewer pigs (over 20 million fewer based on NBS's number; over 45 million fewer based on MOA's) consuming a lot less feed.
Getting back to the inflation story, the CPI for food reported for Q1 2015 was up 1.9 percent year-on-year. But the further back you go in the supply chain, the greater the downward pressure on prices. The factory-level Producer Price Index for food manufacturers was down 0.1 percent and the PPI for agricultural product processors was down 2.3 percent.
Farm and food prices were not as soft as industrial prices. The overall CPI grew 1.2 percent in Q1 2015, slightly slower than the CPI for food. Industrial producer prices were down 4.6 percent, twice as fast as the PPI for agricultural product processors.
Agricultural producer prices overall were flat, with an increase of 0.4 percent. Compare this with the 11.9 percent increase in migrant worker wages and wonder why anyone would stay on their farm. The surge in migrant worker wages is consistent with rising costs beyond the farm gate in processing and services--reflected in rising retail food prices--while the price of raw farm commodities is flat or falling. The rising migrant wages also translate to soaring costs of hiring farm labor for the influx of large-scale farms.
Consumer pork prices were down 1.7 percent, but producer prices for hogs were down 3.6 percent.
Consumer prices for grains were up 2.8% while producer prices for grains were up about the same amount (wheat 3.7%, rice 2.4%, corn 1.3%).
Producer prices for the most labor-intensive ag products were up. Producer prices for vegetables were up 3% and fruit prices were up 8.5%. Consumer prices for vegetables were up half as much--1/4%.
Consumer prices for cooking oil were down 5.7 percent while producer prices for oilseeds were up 3.4%.
Poultry and egg prices have risen 3-to-4 percent as they have staged a recovery from a serious avian influenza epidemic last year. Cattle prices are flat and sheep prices are down 9.6% from Q1 2014.
The Chinese government has kept grain prices at artificially high levels by stepping in to buy grain as international prices have fallen. According to another recent report, on April 8, 2015 the cost of U.S. no. 2 corn including duties was 1570 yuan. The price of domestic corn was 1000 yuan higher than the cost of imported corn--that's a 64-percent difference and about equal to the 65-percent tariff for importing corn without a tariff rate quota. The domestic-imported price difference was reported to be 900 yuan for rice, 700 yuan for wheat, and 1600 yuan for soybeans in March 2015. Grain reserves are at record-high levels, although no one knows for sure how high.
Despite excess supplies, the NBS report also says that Chinese farmers expect to plant even more grain this year. According to a planting intentions survey, farmers intend to plant 1.9-percent more land in corn in 2015, 0.2-percent more rice, and 0.7-percent more wheat. It's not clear where they're finding this additional land. Authorities have let cotton prices fall and announced a lower "target price" for this year. Cotton plantings are expected to decline 11.2 percent this year.