Chinese Pork Demand Pops

In a recent newsletter, China's leading pork industry analyst explained why hog prices are still depressed in that country after two years of shrinking animal inventories.

In his Soozhu.com newsletter, analyst Feng Yonghui observes that Chinese hog producers are confused as to why prices have not bounced back after two years of declining hog numbers. Feng describes the downsizing as a structural response to the anticorruption campaign and economic downturn that have roiled markets in China over the past two years.

Feng estimates that the anticorruption campaign (launched December 2012) popped a bubble equal to 10% of pork consumption. He estimates that before the anticorruption campaign, 7 out of 10 pigs were consumed on family dinner tables, and the other 3 pigs were supplied to restaurants and cafeterias. He estimates that the anticorruption campaign eliminated 1 of the latter 3 pigs. In other words, it popped a bubble equal to 10 percent of demand for pork.

The Chinese hog industry has been in the process of reducing production capacity to meet the new, lower level of demand. The slaughter of pigs that was part of the downsizing process put more pork on the market in the short run, putting downward pressure on prices.

Feng thinks there are two signs that supply and demand may be near balance: the large decline in inventory (reported by the Ministry of Agriculture?) and the leveling-off of feeder-pig prices over the last two months (after a 20-percent decline year-on-year).

One's view depends on which statistics you choose. The National Bureau of Statistics says hog inventories only declined 1.7% in 2014. The Ministry of Agriculture says they declined 7.8%.

Feng doesn't acknowledge price pressure from the world market. EU and US exports have been displaced by Russia's ban on imports from western countries and the euro has devalued. U.S. pork supplies are recovering from the PEDv disruption, aided by low U.S. corn prices. Global prices seem to impact China's pork market more than would be expected given that imports are only 2 percent or less of its consumption. The international dimension makes the search for a new equilibrium even more complex and could prevent the price rebound that Feng and many others expect.