Chinese food inflation was up 2.7 per cent year-over-year in March, down from six per cent the previous month.
This decline was led by a 5.5 per cent decline in pork prices.
China is the world’s largest pork consumer, and pork accounts for a significant chunk of the consumer basket.
Pork prices have been falling since the Lunar New Year holiday. Bank of America’s Ting Lu expects pork prices to stay weak in coming months for four key reasons:
- Sow breeding inventory has been at a “historically high level at around 20.7 million since September 2012.”
- Despite the dead pigs found floating in Chinese rivers there has been no report of swine flu.
- Demand for pork could be hit by the government’s crackdown on corruption, ‘gift giving’ and excesses that have hit the catering industry and high-end restaurants.
- Corn prices have declined and corn is an important feed grain for pigs.
The hog-to-corn price ratio is below 6, “roughly a break-even level for pig farmers,” according to Lu. A lower ratio suggests that pork profitability has declined and it would make more sense to sell corn instead.
“As the current sentiment is quite bearish on coming pork demand, it’s likely that pig farmers would slash existing inventories of both breeding sows and hogs for slaughtering very soon (if that has not been started), which could accelerate the current pork price decline.
“This may cause a downward spiral of pork supply and price in the near term, but the lowering pork supply may fuel up pork prices again when demand starts climbing in August. Such risks of pork price cycle coupled with the unfavorable base effects could lead to a rise in pork prices in 2H13 and 2014.
“Fortunately, the Chinese government in recent years has put more emphasis on stabilizing pork supply by using anti-cyclical tools, while Chinese pig farmers have also got increasingly rational. So without any epidemic, the chance for spiking pork prices and food inflation could be small.”
The Chinese government has already started buying pork for its national pork reserve to help support prices, considering inventories are at a record high:
This chart shows the recent decline in pork prices: