Pork prices in China may rise soon15 August, 2012, 12:14. Posted by Zarathustra
Since the US drought triggered a dramatic rise in agricultural commodities, we have been considering the potential impact on food prices in China.
Earlier we posted a chart showing that the year-on-year change of global corn price is quite correlated with meat prices in China’s CPI. For the moment, we still believe that the impact on food inflation and headline inflation would be modest, and we are surely not expecting the headline inflation jump back to 4.0% yoy in two months. But pork prices might have reached a bottom in short-term.
And this is more than just the drought in US affecting prices. Declining prices in pork prices over the past many months have probably pushed some smaller marginal producers away from the market (while steel makers start farming pig…), and US drought induced rise in corn and soybean is raising the costs. Within China, corn prices are also getting an unwelcome boost from pests which infected corn. According to Securities Times, Mythimna separata, which is a species of moth, is discovered in Jilin, Hebei and other places in China. As Mythimna separata feeds on corn, large area of corn farms were affected, adding fuel to the already rising corn prices.
Thus it is now in the consensus that pork prices will start rising in August or September, and food prices inflation may return in 2013 according to Jean-Yves Chow (via China Daily):
"China could experience significant food price inflation in the first quarter of 2013 for two main reasons: an increase in the price of soy will impact feed prices; and ultimately that will be transferred to pig prices.
"If the feed price rises too fast, small to medium-sized farms will not replenish their herds, as a result of lower profit expectations, or even losses, and so there could even be shortages of pork at this point," Chow said.
In the first half of 2013, the food CPI will start an upward trend, possibly even reaching more than 10 percent in the third quarter of 2013, at the top end of expectations, Chow said.
Although we probably less pessimistic regarding the food inflation than Jean-Yves Chow, we expect some pick up of pork prices in the coming months. Thus both food inflation and the headline inflation could tick slightly higher for the remaining months of the year despite underlying deflationary trend in non-food prices. Again, we are not expecting CPI inflation to reach 4.0% yoy in two months or so, but we suspect that any uptick in inflation would make the perceived room for policy easing narrower.