It is no coincidence that pork prices are once again in the frame for pushing up China’s consumer prices. Pork prices have such a decisive impact on CPI that some unkindly refer to the indicator as the ‘China Pig Index.’
The CPI measures the change in price of a basket of goods intended to accurately represent households’ consumption spending. Most of China’s households are poor by international standards and so the share of food in their total spending is high. The National Bureau of Statistics does not release data on the weights of the CPI, but most economists estimate that the share of food is about 30%.
Pork is China’s favorite meat. In 2010, analysis by a researcher at the Chinese Academy of Social Science suggested that pork made up a third of the food part of the CPI basket, or 10% of the CPI as a whole making it the largest single component.
Food prices are volatile. In the last decade, data from the National Bureau of Statistics show food prices peaking at 23.3% year-on-year in February 2008. The peak for non-food prices was less than 3%.
Within food, pork prices are particularly volatile. In March 2008, the increase in pork prices rose to a peak of 74% year-on-year. If pork really is 10% of the CPI basket an estimate that may be on the high side that alone accounts for 7.4 percentage points of the CPI’s rise.
Pork prices have risen again. Ministry of Commerce data shows pork prices in mid-June at a record high of 23.6 yuan/kg, up 62% year-on-year (in Chinese).
In 2008, the rise in pork prices was blamed on an outbreak of blue ear disease. But industry experts believe that the disease which affected only a small fraction of China’s pig population was only part of the explanation. The real reason for the dearth of pork was market dynamics, and many of the same forces are at work today.
An increase in demand is part of the picture. China’s households are becoming steadily richer. At low levels of income, increases in wealth translate into demand for more meat in the diet. The surge in China’s money supply in the last two years also means there is more money chasing less pork.
But to understand the real reason for surging pork prices, it is necessary to take a trip down to the farm and take a look at the supply side.
A high proportion of China’s pork up to 90%, according to industry experts 岸 is raised by farmers in small-scale commercial operations and backyard outfits involving a handful of pigs each. These farmers are acutely sensitive to the movements in price that determine their profit or loss. The two most important variables: the price of pork (the output) and the price of corn (the input).
A pork-to-corn price ratio of 6:1 is enough for pig farmers to break even. In summer 2009, when pork prices were low, the ratio hovered just above 6 and there was little incentive to farmers to breed more pigs. As a result, sows were taken out of the breeding herd and slaughtered for meat. A year and a half down the line, the consequence is a dearth of pork and higher prices.
According to the government which publishes weekly data on the subject the pork-to-corn price ratio has now improved to 8.5, up from 6.6 at the beginning of the year (in Chinese).
That is above the level required for farmers to break even, but probably not high enough to turn sleeping boars into sty Casanovas. By way of comparison, at the beginning of 2008 the ratio that had farmers piping old-time love songs into the sty was above 10.
At the same time, rising wages available to rural workers if they leave the farm for the factory increase the cost of agricultural labor. Data on off-farm rural wages are difficult to come by, but reports from the ground and small scale surveys suggest wages may have risen by around 15% in the last year.
NBS data on manufacturing wages in small private enterprises paints a similar picture, with wages up 16.4% in 2010.
Higher wages in the factory raise the opportunity cost of staying on farm. That means rural workers are likely to demand higher wages, adding to the cost of pig production.
For the past several months, China’s central bank has been steadily tightening its grip on credit in an attempt to keep the CPI from rising too quickly. Industry experts say China’s slaughterhouses have generally been short of working capital, which means that they have little cash to buy pigs from the farmers. The government’s move to cut credit means that the slaughterhouses have even less cash to work with.
The perverse consequence is that tightening monetary policy to control inflation actually reduces the supply of pork, contributing to the higher food prices that are the proximate cause of inflation.
Higher prices for pork will improve incentives to farmers and eventually boost supply. Falling corn prices, especially if the U.S. moves ahead with plans to cut ethanol subsidies and international prices fall, will also improve farmers’ profit margins.
But even if the new litter is already on the way, it will be the end of the year before they are ready to trot to market. And even as cyclical pressures ease, structural pressure from rising agricultural wages and higher demand for meat from households are here to stay.
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