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Pigs Will Fly Before China Solves Pork Inflation

Price volatility is the result of a reliable boom-bust cycle driven by breeding patterns. Derivatives won’t help.  

Pigs Will Fly Before China Solves Pork Inflation
Pigs are kept in pens at a pig farm in Langfang, Hebei province, China. (Photographer: Gilles Sabrie/Bloomberg)

(Bloomberg Opinion) -- Chairman Mao’s favorite meal is looking a lot more expensive these days. 

The price of Chinese pork – used to make a sweet-spicy-fatty dish beloved by the country’s former leader – surged 21% from a year earlier in June, the National Bureau of Statistics reported Wednesday.

The bureau doesn’t break down the weightings of different products in the basket used to calculate its key inflation measure, but pork has probably played a part in the consumer price index reaching 2.7%, close to its highest level in five years (the core CPI measure, which excludes food and energy prices, is looking distinctly subdued).

Food is the biggest element after housing in the CPI, according to estimates by Bloomberg Economics analyst David Qu, and pork is the largest slice of that pie, amounting to about 2.5% of the total inflation basket.

Pigs Will Fly Before China Solves Pork Inflation

Pig meat makes up a smaller share of the total than it did in the past as the bureau adjusts to reflect China’s increasingly affluent economy, but a 50% rise in prices would still add 1.2-1.3 percentage points to inflation, according to Qu’s numbers. Such a dramatic increase isn’t as improbable as it may seem: Despite the effects of a trade war and a cull of around a fifth of China’s hogs, the latest spike looks relatively modest.

Compare what’s happening now with 2016, for instance, when pork prices climbed 34% in May; or 2011, when they jumped 57% in June; or 2007, when the increase in August from a year earlier peaked at 87%. In that light, the current jump is little more than a blip.

The fact is, Chinese pork prices are notoriously volatile. There’s even a well understood reason for this, which tends to result in a recognizable four-year cycle of boom and bust. When pork prices are high, farmers try to raise more piglets. When they’re weak, sows are slaughtered to stop them from producing too many more.

The process takes about 18-20 months in China, according to a 2012 study for the U.S. Department of Agriculture, meaning the trough when prices fall into deflationary territory is a more or less direct result of the peak that caused farmers to breed so many pigs in the first place – and vice versa.

One answer would be to try to keep pigs alive longer and ride out the weak patch in the market, but margins are tight in hog farming. The odds of incurring a loss go up sharply if you’re buying additional months of feed in the hope that prices will rise.

Another idea that China has tried since the 2007 price spike is to keep a mountain of frozen cuts on ice and buy and sell to stabilize prices, in the same way that the U.S. strategic petroleum reserve is used to take the swings out of the crude market. Judging by the performance of the pork market since then, that hasn’t really worked; one 2016 paper found that volatility had increased, not decreased.

Pigs Will Fly Before China Solves Pork Inflation

One final expedient would be to rely on imports, but even that approach has problems. China, after all, consumes almost half the world’s hogs; if you cull a fifth of the herd, the entire volume of global pork trade won’t be sufficient to plug the gap. That’s especially so considering the world market is bifurcated between a U.S.-led group that accepts meat raised with the growth drug ractopamine and another led by China and the European Union that bans it.

What else could be done to stabilize this chaotic trade? One idea being developed by the Dalian Commodity Exchange has been to develop a futures market. Corn, which helps determine Chinese pork prices because of its role in animal feed, has been a key derivative on the exchange since 2004.

That would at least mean that the risk of pork’s price swings could be diverted to speculators, from producers and consumers who have no appetite for it. Just don’t expect that to end the cycle of boom and bust. If you think a futures market will be enough to flatten out the peaks and troughs of China’s hog industry – well, pigs might fly.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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