How High Can Chinese Pork Prices Go?

"How high can pig prices go in the second half of 2019?" asked an article posted on Chinese pork industry site zhue.com.cn this week. Pig prices have actually gone up surprisingly little over the past year in view of the huge declines in swine numbers reported in China. Prices dipped in February and hog prices really just began to show clear upward momentum in June 2019 in most parts of China. Prices are still falling in southwestern provinces where another panic slaughter phenomenon has been underway.

Chart from zhue.com.cn showing Chinese hog prices from January 1 to July 2, 2019. Orange line represents northeastern provinces; blue represents national average; gray line represents Sichuan Province.

Nevertheless, rising Chinese hog and pork prices in the second half of the year are an "indisputable fact," zhue.com.cn said. China's Ministry of Agriculture and Rural Affairs (MARA) reported an average live hog price of RMB 16.72/kg in the last week of June, up 3.8 percent from the previous week. The average hog price in the last week of June was 11.7-percent higher than in the last week of May, and the pork price was up 6.7 percent from a month earlier. Hog prices have been rising fastest in northeastern provinces that were the first and the hardest-hit by ASF a year ago. Prices are also rising in Guangdong-Guangxi provinces where extensive outbreaks occurred in recent months.

Zhue.com.cn asked 85 Chinese pork companies how high they expected hog prices to go in the second half of 2019. More than half expected a price of RMB 22/kg--a RMB5 increase from the June average--while 16 percent expected the price to go up to RMB 24, another 20 percent expected a price of RMB 25, and 7 percent expected a near-doubling of the price to RMB 30/kg this year.

Survey of 85 companies by Zhue.com.cn

China's hog and pork prices are still not near record highs, but China could see a string of monthly pork price increases extending into 2020 or 2021 if past pork price spikes are replicated. The chart for hog prices below shows three past episodes of Chinese hog price increases and possible future paths if those historical runs of price increases are replicated in 2019 and beyond. The 2006-08 price spike occurred during China's biggest previous hog disease crisis--PRRS aka "blue ear disease." The next peak in September 2011 followed a PEDv epidemic. A June 2016 peak occurred after a kill-off of sows driven by poor market conditions and environmental regulations that closed thousands of pig farms. In each instance, there were extended runs of monthly increases followed by rapid decline.

If prices followed a string of monthly percentage increases identical to the 21-month episode in 2006-08, Chinese hog prices would soar from their current RMB 17/kg to a peak of RMB 45/kg in February 2021. If they followed the 2010-11 path, prices would peak at RMB 33/kg in September 2020. If prices followed the more moderate pace of 2015-16, the peak would be RMB 23.5/kg, also in September 2020. At the end of 2019 the price would hit RMB 22/kg on both the 2006-08 and 2010-11 paths--the same price 57 percent of the zhue.com.cn survey respondents expected--and the price would only hit RMB 19-20/kg at the end of 2019 on the slower 2015-16 path.

Future price increases beyond June 2019 replicate monthly increases from 

past price cycles in 2006-08 (red), 2010-11 (green), and 2015-16 (dark blue).

There is no guarantee that the coming pig price cycle will replicate past cycles, but there are several common features of past cycles that are likely to recur:

• past price increases extended over 15 to 20 months 
• strings of rapid monthly increases averaging 4-to-5 percent were interspersed with periods of decline
• each cycle had a sharp peak in price followed by rapid decline in price 
• peaks and valleys of each cycle were at least a high as those of the previous cycles

The severity of the production decline due to ASF appears to favor a scenario of rapid growth in prices over an extended period like the 2006-08 rise in prices. Indications are that ASF has resulted in China's most severe contraction in pork supplies since the Great Leap Forward disaster in the early 1960s. MARA's report of a 23.9-percent year-on-year decline in the May 2019 sow inventory portends significant declines in pork production that should take hold this year and become more severe in 2021. Frozen pork inventories and shipments from panic-slaughter hot spots have bolstered supplies in the short run, but those will be depleted in the second half of the year. A 10-percent, 20-percent or even more severe reduction in China's pork output phased in over the next two years is possible. Shrinkage of the pork supply suggests an unprecedented rise in prices.

In 2007, China had a 7-percent reduction in pork output that led to a cumulative 150-percent increase in hog and pork prices. Flat production in 2011 led to an 89-percent increase, and a 4-percent decrease in pork output during 2016 led to a 46-percent increase in pork price. Thus, past experience makes it plausible that a 20-percent shrinkage in pork output could send prices upward by more than 150 percent.

A rebound in pork production in response to rising prices could mitigate the size and length of the price surge. In past episodes Chinese pork supply readily bounced back as high prices attracted expansion by farmers: high prices and profit margins prompt farmers to raise a new cohort of sows that produce new litters of piglets to raise to slaughter weight, driving prices back down as fast as they rose. The long run of price increases reflects biological lags in raising a new cohort of sows, gestation and fattening of market hogs. As this cycle begins, big companies with strong biosecurity and access to capital are already maneuvering to expand in this manner, and government officials have promised financial support targeted to large pig farms.

However, it's not clear that big farms alone can expand output as fast as small- and mid-size farms did in past cycles. In past cycles individually-operated farms could expand rapidly via their access to land, minimal overhead costs, and lack of regulation. While many of the big companies aim to expand in the current cycle by incorporating moderate-sized farms using a "company + farmer" strategy, individually-operated farms are still hesitant to expand due to fears of ASF, high feeder pig costs, and lack of cash. A recent MARA survey found that half of farmers were not interested in adding hogs right now. In the face of a pork shortfall, will Chinese officials at the local level maintain their vigilance enforcing environmental curbs on pork farms and bans on swill-feeding? Maybe not, but cascading requirements for biosecurity, manure treatment, bans on swill, and decontamination of feed ratchet the cost structure upward and are bullish on pork price increases.

Pork imports and substitution of other proteins put the brakes on the rise in pork prices. China's pork imports have surged during each of the past three pork price spikes. USDA says China's pork imports hit a record 2.2 million metric tons during the 2016 price spike, and imports are sure to break through this record this year or next. Imports are already on a brisk pace this year, despite very high tariffs on U.S. pork. It doesn't help that China just banned pork imports from Canada, one of its top suppliers of imports.

Of course, pork prices can't be viewed in isolation from other prices. Historically, pork prices don't stray too far from the price of chicken--an important substitute. Beef and mutton are other substitutes but troubles raising cattle and sheep sent Chinese beef and mutton prices soaring far above pork prices a decade ago. As pork prices rise, consumers, restaurants, cafeterias, and processors will substitute other meats for pork if substitutes are cheaper. Trouble is, China's capacity to supply more poultry, beef, sheep, fish/shellfish, and eggs may not fill the deficit. Rising pork prices may drag chicken and beef prices upward with them. A pork price of RMB 50/kg could pull the chicken price up to RMB 30-40/kg. Beef/mutton prices could go higher too. These other meats are also prone to crises. When will the next avian influenza outbreak occur? Will TV reporters discover more chickens soaked in antibiotics or beef made from rat meat?

On the other hand, China's relatively weak economy and general downward pressure on commodity prices could restrain growth in pork prices this time around. The rapid pace of price rises set during the 2006-08 cycle was probably accelerated by global commodity price inflation during those years that leaked into the Chinese economy. The 2010-11 cycle also occurred during a time of high commodity prices, but the more moderate 2015-16 price rise occurred after the commodity price inflation bubble had been pricked. China's CPI rose about 5 percent during the 2006-08 and 2010-11 cycles, but just 2 percent during 2015-16. Prices remain mostly soft in China now--except for commodities facing supply disruptions from disease, weather or army worms--suggesting a moderating influence on this round of pork price increases. China's CPI was 2.7 percent in May 2019--about half the inflation rate in the 2006-08 and 2010-11 cycles.

In summary, the severity of the supply disruption suggests a record surge in pork prices, but the lack of inflationary oomph and resistance to crazy-high prices might prevent a 150-percent price-increase scenario. The RMB22 expectation of hog prices by the end of the year guessed by most pork companies is surprisingly consistent with the historic price paths, but the companies weren't asked whether prices would keep rising next year.