The Meat of China's Inflation Problem

High pork prices may affect the nation's cuisine

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In any major economy, policymakers aim to calibrate a balance between growth and inflation. That balance has decisively shifted to taming a stubborn bout of inflation in China -- at least for the time being -- even at the expense of a modest slowdown in economic growth. Indeed, June's year-on-year CPI rose to a new high of 6.4 percent, about what most economists anticipated. Likely to preempt the release of inflation data, China's central bank last week raised interest rates (specifically, the one-year lending rate) another 25 basis points to 6.56 percent -- the fifth time since last winter that the rates have been hiked.

Rising cost of corn + slackening pig supply + policy tightening = pork-less diets?


There are many contributors to inflation, but what stands out now is a resurgence of food inflation, which was 14.4 percent on an annual basis, up nearly 1 percent from May. More specifically, it's all about the pork, with prices up a whopping 57 percent, year on year. Tom Orlik at the Wall Street Journal has the story:

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.

Is it simply an issue of supply and demand? After all, the Chinese are one of the world's biggest pork consumers. If you've ever lived in China (or visited any Chinese restaurant for that matter), pork dishes abound. In fact, when most Chinese say they are having meat, it usually means pork. It's the meat of the emperors. Mao Zedong's favorite dish was supposedly the braised pork specialty from his hometown Hunan -- and I can attest that it is truly delicious, even though it usually contains a layer of fat half an inch thick.

As consumption habits change, particularly among the urban wealthy, more pigs are being slaughtered to feed the Chinese public's expanding appetites. Another 2007 WSJ piece pointed out that "At nearly 4 ounces each day, the average person here eats more pork than in any other nation except Germany, according to the United Nations Food and Agriculture Organization. (Poland and Austria are close rivals.)"

While it seems like a near-term mismatch of supply and demand has contributed to the latest spike in pork prices, underlying structural issues are likely to ensure cyclical price swings. This is in part because the Chinese agricultural sector remains highly fragmented, with numerous small pig farmers highly sensitive to market fluctuations and prices. Some of this also appears to be due to the rising cost of inputs, as Orlik continues:

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.

As Mr. Liu, a meat vendor from a Beijing supermarket ruminated, it's all about incentives for farmers: "High prices now makes sense, since last year vendors were losing 400 to 500 yuan per pig due to too many being reared. Personally, although people say it is a high price, I think they need to maintain it. After all, if the price is lowered, no one will want to rear the pigs anymore."

Higher prices for pork are now improving the ratio and strengthening the incentive to farmers to breed more pigs. But with corn prices also at record highs, the ratio has not improved that much.

Rising cost of corn + slackening pig supply + policy tightening = pork-less diets? Perhaps it is no coincidence that one of the deals Premier Wen Jiabao signed with UK's David Cameron was an order of British pigs worth nearly $2 million. And, as far as corn prices are concerned, is the United States coming to the rescue as China softens its stance on food security and basic self sufficiency?

Presented by

Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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