China ag inflation? Oink...gurgle

Stratospheric Chinese hog prices helped float prices of feeds and meat upward last year, but sinking hog prices this year may be exerting a downward gravitational pull on other prices as hog farmers fall underwater.

Hog prices reported by China's National Bureau of Statistics (NBS) in May 2021 were more than 50 percent below their early January level and are now below breakeven levels for wean-finish farms and at or near the breakeven point for farrow-finish farms in China. Farmers have been selling hogs in a panic as prices fall in the offseason for Chinese pork consumption. Last week's Beijing Xinfadi wholesale market report said mainly large carcasses are arriving--super-sized "second-time fattening" hogs--but very small carcasses are also arriving as farmers slaughter immature animals to cut their losses. Another industry report commented that a fattened hog brought 3000 yuan in profit last year, but now loses 1000 yuan. 

Source: China National Bureau of Statistics, raw material purchase prices.

High hog prices and generous subsidies during 2020 spurred aggressive hog farm expansion, feverish entry, and an erosion of productivity. Feed prices were driven higher, and production costs soared. The price of substitutes for pork--from tofu to beef--were also driven higher. 

The NBS purchasing price data indicate that upward momentum has dissipated for ag prices in China since hog prices began their decline. Prices of corn, soybean meal, and cotton are well above year-earlier price levels--when China was exiting its covid-19 lockdown--but ag prices appear to have peaked during January-March and show little or no upward momentum in May 2021.

Source: China National Bureau of Statistics, raw material purchase prices.

Ministry of Agriculture wholesale price data show beef prices started to slide over the last couple of months. Chicken prices peaked briefly in late 2019 (when pork prices were at their peak) and have fluctuated relatively little over the past year.  

Source: China Ministry of Agriculture and Rural Affairs, wholesale prices.

China's inflationary momentum has shifted to industrial commodities. Year-on-year rises in industrial prices are exaggerated by "base effects" (i.e., industrial prices were depressed a year ago during March-May 2020). Prices of copper, steel rebar, aluminum, and pvc have been on the rise this year, but prices seemed to peak in May as these prices also downshifted late in the month. 

Source: China National Bureau of Statistics, raw material purchase prices.

Chinese analysts think hog prices may bottom out by July-August after the stock of super-size pigs has been cleared out. A diarrhea epidemic that killed off piglets in February may tighten the supply of fattened hogs by late summer, just when seasonal demand starts to rebound. 

Today Chinese officials trotted out recycled plans to stabilize the pork industry by improving the national buffer stock of frozen pork reserves. Twelve years ago an elaborate "hog price alert" stabilization plan was introduced by the same government departments following a disease-driven 2007-08 spike in hog prices. The 2009 plan was supposed to do all the things the same officials are promising today: publish a dozen or so statistical indicators to give farmers more accurate market expectations, issue "early warnings", and trigger government purchases and sales based on the hog-corn price ratio to tamp down gyrations in sow numbers and smooth price fluctuations. Nearly all of the promised data series quickly vanished. The Ministry of Agriculture recently mentioned that it plans to abandon the hog-corn price ratio as a profitability measure.

Why isn't the government swooping in now to buy up the surplus pork? Maybe because analysts estimate that 1.7 million metric tons of import frozen pork are already held in reserves. The commercial value of these reserves has sunk along with market prices. The freezers may already be jammed full of pork. Assuming reserves were purchased on credit officials are surely financially underwater on the reserves they bought last year and unable to finance new purchases to sop up the excess pork in the domestic market now.