Pork prices, regarded as a gauge of China's inflation, have fallen to an eight-year low, stoking fears of deflation. As record oversupply and weak domestic consumption combine to push prices below production costs, the Chinese government has issued its highest-level alert and moved to forcibly control output.
According to China's Ministry of Agriculture and Rural Affairs on the 1st, the previous day's average pork price at wholesale agricultural markets nationwide was 15.31 yuan per kg (about 3,353 won). That was a plunge of more than 20% from a year earlier. According to the business outlet Caixin, pork falling below 16 yuan per kg has happened only in May 2018 and this time since related data began to be compiled in June 2013.
In China, pork consumption rivals rice consumption. More than 60% of meat consumption is pork, at about 40 kg per person annually. Because pork has such a heavy weight in the consumer price index (CPI), declines in pork prices feed into a broader drop in inflation gauges. For this reason, the Chinese government sometimes adjusts reserves to control prices whenever pork prices swing.
◇ Supply is overflowing while demand is quiet… the more they sell, the deeper the losses
The primary cause of the pork price crash is oversupply beyond the reach of controls. China's pork supply is now at its peak. In March, major pig-farming corporations planned slaughter volumes that jumped 17.6% from the previous month, with some regions seeing increases of more than 40%. In addition, oversized hogs of 140 kg or more that missed their slaughter window are flooding the market, accelerating the price decline.
Caixin said, "Pigs whose slaughter had been delayed for a long time are arriving on the market all at once," and noted, "Over the past two years pork supply has been ample, so a gradual reduction was needed, but the cutback process is slow and inefficient."
Demand, by contrast, is weak. After the Lunar New Year holiday, the market has entered a traditional off-season, and the economic downturn has further chilled dining-out demand. As a result, the ratio of pork prices to feed prices has fallen below 5 to 1, pushing hog farms into a zone where the more they sell, the more they lose. A 5-to-1 ratio is generally considered the break-even point for hog farmers.
◇ Short-term rebound seen as unlikely despite government curbs
With conditions like this, the National Development and Reform Commission (NDRC) issued a "Level 1 alert" for excessive declines in hog prices. To stem the slide, authorities began purchasing central pork reserves and unveiled aggressive restructuring measures.
The Ministry of Agriculture and Rural Affairs lowered the target breeding herd of sows to 36.5 million from 39 million, a 7.8% cut, and also reduced the annual slaughter target. At the same time, it will strictly manage slaughter weights and introduce an annual production registration system. The move is seen as shifting from advisory cutbacks to stronger regulation to forcibly curb supply.
However, the economic impact of the pork price crash is expected to persist throughout the year. In a report, the comprehensive financial firm Nanhua Futures said, "Even if hog corporations implement production cuts immediately, it will take at least 10 months for the oversupply problem to ease," projecting that downward pressure on inflation from plunging pork prices will continue for the time being.