Reports of newly arrived pigs running riot through Chinese cities may be greatly exaggerated but they are telling nonetheless. At the end of September, stories appeared about Beijing releasing 30,000 tons of live pigs from its central reserves to bring down the price of food.
The inflation rate hit an 11-year high of 6.5% in August, driven by an 18.2% rise in food prices, which make up a third of China’s consumer price index. With the price of meat alone jumping 49.2%, an increase in the supply of pork – the country’s staple meat – was intended to alleviate some of the pressure.
While this makes sense in principle, some people find the idea of a central pig reserve rather bizarre.
“The government was not secretly keeping pigs somewhere. Contrary to what was reported, it was not live pigs, just frozen meat,” said Sari Soderstrom, sector coordinator for rural development at the World Bank in Beijing. “Last year the government advised the big cities to keep supplies of frozen pork and these are the stocks that have been released.”
This misconception is one of several to have emerged concerning the impact of food prices on inflation.
There is no question that rising disposable incomes have led to growth in meat demand. China produced 53% of the world’s pork in 2006, but the Ministry of Commerce has said pork imports will more than quadruple this year to 100,000 tons to cope with rising consumption.
This comes amid much talk of an impending boom in China’s agricultural imports. In addition to the dietary changes, the loss of arable land, water and irrigation problems and a diversification away from grain production are putting the country’s food supply under pressure.
As a result, China’s appetite for soft commodities seems destined to resemble its ravenous appetite for the hard variety.
Yet, as economists have said, the spike in food prices is more of a supply shock than a demand one. Indeed, following measures to increase the pork supply, the price of the meat has started to fall.
The pig cycle
China is no stranger to volatile pork prices. Soderstrom notes that current prices, adjusted for inflation, are not that much higher than those seen during a spike in 2004. Looking back further, pork prices have spent much of the last 20 years traversing between peaks and troughs.
“This kind of ‘pig cycle’ is well known among agricultural economists,” said Fred Gale, a China specialist at the US Department of Agriculture’s (USDA) economic research service. “It gets profitable, so people enter the business; once it becomes less profitable, they leave.”
The situation is exacerbated in China by the fragmented nature of the animal husbandry industry, which means it takes time for information on market demand to reach the farm gate.
“Farmers lack forward planning so there is always a time lag,” said David Tsoi, Hong Kong representative for People’s Food, one of China’s largest suppliers of pork products. “It takes six months for pigs to mature. They rush to raise pigs when prices are high but when the pigs are ready for market, there is a glut in supply and the price drops.”
Tsoi acknowledges that things have been made worse by an outbreak of blue ear disease, a potentially fatal respiratory and reproductive condition. But he is most concerned by increases in the price of soybeans and corn and the effect this has on the price of animal feed.
It is here that China’s local battle with food finds a global edge. Soybeans accounted for nearly a quarter of China’s agricultural imports last year, but growing biofuel use in the US and Europe has led to a rise in the price of these products.
Soybeans aside, though, these imports are still relatively small. Much was made of China becoming a net food importer for the first time in 2004 but if you discount cotton, rubber and animal hides – which tend to be used in manufactured products that are exported – and include fish, the country is still a net exporter.
This would suggest that the soft commodity boom is still some distance away.
The Organization for Economic Cooperation and Development (OECD) projects that China will have become a genuine net importer of food by 2016. But it will account for only 3% of global agricultural imports and the key growth areas will still be oilseeds and soybeans.
Security first
Obviously, government policy plays a role here. China’s comparative advantage lies in its large supply of labor rather than its limited supply of land. Therefore, many people have predicted a surge in corn imports as it is a land intensive crop. But according to USDA calculations, China was 100% self sufficient in corn last year, up from 93% in 2001, an anomaly attributed to fears of becoming too dependent on imports of staple goods.
As long as Beijing prioritizes food security above comparative advantage, China’s agricultural imports may defy logic.
“There are some measures to secure food security through a high level of self -sufficiency in grain production,” said Andrzej Kwiecinski of the OECD’s directorate for agriculture, food and fisheries. “This is not what we would suggest within the broader concept of food security, which is the ability to provide food from domestic or international sources.”