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China Struggles to Tame Pork Prices
By CHUIN-WEI YAP
JULY 14, 2011, 6:27 A.M. ET.

BEIJING—Government measures to increase China's hog population to tame sharp pork price rises that have fueled broader inflation may produce only limited results in the second half of the year, analysts said.

With sharply higher pork prices stoking Chinese inflation, Beijing said Wednesday it would resume a 2.5 billion yuan ($385 million) investment program to support large-scale pig farms. The government also said that it will provide a subsidy of 100 yuan per sow to encourage farmers to support pig production. The goal is to boost supply to help bring down surging prices of pork, a staple food for Chinese households, which have also contributed to higher U.S. pork futures prices, as exporters anticipate increased demand from across the Pacific.

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China's hog population is expected to rise about 2% from last year, Rabobank said. Above, pigs at a farm in Qingdao.
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China's pork prices have been rising since March 2010, reaching a record 23.61 yuan a kilogram in mid-June, 57% higher than a year earlier.

Premier Wen Jiabao singled out pork, a staple among Chinese households, as a leading cause of accelerating inflation, after the consumer-price index jumped 6.4% in June, its highest rise in three years.

U.S. lean-hog futures rose 1.7% to 99.6 cents a pound at the Chicago Mercantile Exchange Wednesday on the back of a sharp rally in corn prices and a recent rise in pork prices.

News of China's government measures underpinned prices, even as a U.S. Department of Agriculture report Wednesday also showed U.S. pork exports continuing to boom this year.

But analysts said it is likely to take at least four to six months before it is clear if the policies are effective.

"Farmers only really began replenishing pig stocks in June, and these [new hog stocks] can only be brought to slaughter in four to six months," said Chenjun Pan, an agriculture analyst with Rabobank.

China's hog population is expected to rise about 2% from 453 million head last year even with these enhanced measures, Rabobank said. "It's not that easy to increase the hog population and it won't have immediate results," Ms. Pan said. Beijing's subsidy to farmers for raising sows would effectively expand a previous subsidy that was limited to a smaller population of preapproved sow breeds, said Ms. Pan.

The investment program for hog-farm infrastructure was suspended in 2008, once prices eased after the last spike, but bouts of foot-and-mouth disease from March 2010 and swine flu in mid-2009 culled the hog population, restoring upward pressure to pork prices.

China has also made commitments to subsidize pig immunization and other public-health measures to more closely supervise the potential safety hazards of rapidly ramping up China's hog population. Analysts are expecting pork prices to top out soon, regardless of the new subsidies, although it's unclear how much they might come down.

"We expect pork prices to rise a bit further in July, and pork inflation at about 60% year-on-year, and start to decline in August on the coming rise of pork supply," Bank of America Merrill Lynch economist Ting Lu said.

"We expect prices will fall slightly [in the months ahead] but not that much, though the chances of a continued price increase will also be smaller," Rabobank's Ms. Pan said.

The pressure on pork prices has also fed into import demand for corn, though analysts said it's less clear if it will immediately result in higher demand for foreign pork.

"I don't think pork imports are going to rise much, as global prices are still quite high and have risen sharply," Zheshang Futures analyst Xu Wenjie said.

Still, data from the U.S. Meat Export Federation indicate 2011 U.S. pork exports to Hong Kong and China could grow 14% on year.

The increased demand is more apparent in the corn sector. China has bought 3.7 million metric tons of corn from the U.S. so far this year, with sales for the full year likely to reach 5 million tons, an executive with a major state-owned grain trading company told Dow Jones Newswires earlier this week.

Such a volume would dwarf last year's 1.6 million tons of corn imports and mark the second consecutive year China has been a net corn importer after 15 years of net exports.

China's total corn imports for the year will likely use up 70%-80% of the government's annual tariff-rate quota of 7.4 million tons, Shanghai JC Intelligence Co. analyst Xiao Jun said this week.