Rich? You Need a Bacon Necklace
Internet meme takes off as pork price skyrocket
Millions of dead pigs are beginning to have a major impact on the food security of 1.4 billion Chinese. One year ago, China confirmed its first case of African Swine Fever (ASF), a deadly pig disease that is devastating to pig herds and extremely challenging to contain, but thankfully harmless to humans. The presence of ASF in China is particularly dire because Chinese people eat more pork than everyone else in the world (combined) and raise more pigs than the rest of the world (combined).
This situation has been simmering for a year. Recent data from the Chinese government is causing it to boil over. In July, Chinese government data indicated that the Chinese herd fell by 33% since last year, which will cause a pork shortage of 10 million metric tons this year alone. This shortage cannot be alleviated by imports because fewer than 10 million metric tons of pork are sold internationally annually.
Ten million metric tons translates to 20% of annual Chinese consumption. And this number is conservative since the Chinese government tends to massage data to fit its narrative. After the government data was released in July, the price of Chinese pork increased by 23% between July and August. That brings the year-over-year total to 47%. With demand and fear rising, pork is selling for $4.92 per kilogram in China, compared to $ $3.74 in the United States.
In China, pork inflation is a major factor in overall consumer inflation (CPI). The Chinese Academy of Social Sciences estimated that pork prices accounted for 10% of the monthly CPI reading in 2010. Historically, when pork prices go up, overall inflation increases. A rapid rise in pig prices because of ASF could spread to other parts of the economy.
Experts today believe that the weight of pork inflation on the CPI has declined to 2%. One reason is that pork consumption has stabilized in recent years. If incomes keep rising, people can purchase other items, diversifying the CPI basket. Also, in urban areas, people are eating more beef and seafood. Again, reducing reliance on pork. These factors might mean that this pork price spike might not be as bad for the overall economy as previous ones.
Options to Mitigate Inflation
The fear of economic slowing caused by higher pork prices has caused the Chinese government to take action. First, the Central Bank eased monetary policy, to make borrowing cheaper and to stimulate the economy. This is a major reversal from the last few years when the Central Bank was in a period of tightening, trying to deleverage the economy. High debt levels will continue to be a concern, but now the government must address the immediate problems caused by high pork prices and not worry about a possible debt bubble in the future.
In addition to easing monetary policy, China is taking other actions to keep its citizens fed and keep pork prices manageable. However, none of these solutions are silver bullets.
The government is offering incentives to farmers and businesses willing to invest in new pig operations, most notably low-interest loans. This is a typical tool used by governments, however, it is less effective in this situation for two reasons. First, ASF is not contained. The disease is in every Chinese province and it is still claiming new operations. In some cases, after farms get infected by ASF, they clean the farm and then get the disease again.
Second, breeding sows are also dying from this disease, not just pigs for slaughter. Before new pigs can be put into these new operations, the breeding herd needs to be replenished. This takes time. A breeding sow will be pregnant for 3 months. It takes her female offspring 18 months before they reach reproductive maturity. Then they will have to be pregnant for 3 months before they have new piglets.
Pigs that are born that will not become breeding sows will be raised on a pig operation for 5–6 months before they reach market weight. Meaning, the fastest pigs can be restocked with current sows is 5–6 months. That’s a significant lag time.
In the 1970s, the Chinese government started keeping pork reserves in case of a crisis, like the current situation. Governments are putting these pork reserves into the marketplace to increase supply. The reserves will help, but they are small, an estimated 1 million tons.
Imports cannot solve this problem, because the 2019 shortage is higher than the amount of pork traded on the international markets in a year. Plus, Vietnam and the Philippines (two major pig producers) are also battling ASF, and pork from the United States faces a 62% tariff. Buying U.S. pork will address food security concerns but will not help the inflation issues.
Higher prices will reduce demand. People will not be able to afford as much pork and demand will decline.
The government is trying to further reduce demand through an educational campaign. A recent article was titled, “Pork, it’s better for you to eat less,” highlighting the health benefits of eating less pork. The government hopes that these efforts will further decrease demand.
Some provincial or local governments are subsidizing the price of pork so consumers pay less at the store. Others are offering additional aid specifically to low-income residents.
The situation is critical. The severity is still unknown. It could be a serious supply-side disruption or it could drastically impact global protein prices and food security for 100s of millions of people around the world. The best thing that will come out of ASF is better biosecurity in China and globally. The Chinese pig sector is extremely diverse, with various sizes and levels of quality management systems. This event will eliminate small scale farmers. Large, well-managed and highly capitalized farms will dominate the Chinese pig industry.
Originally published at https://gns.pub on September 6, 2019.