A rally in Chinese pork prices that got underway in mid-March looks set to continue, posing an inflationary threat that may make it tougher to kickstart the economy from its virus-induced slump.

Wholesale prices of China’s most popular protein — which is estimated to have the highest weighting for food in the nation’s CPI basket — have risen by around a fifth since March 18 to 21.17 yuan ($3.16) per kilogram, data from the Ministry of Commerce show. Hog prices have jumped even more, up 38% over the same period, according to Shanghai JC Intelligence Co. 

All the indications are that the price surge will continue as a cull of breeding sows that started last year restricts supply, while demand improves as Covid-19 curbs are eased. Major listed hog producers Muyuan Foods Co. and New Hope Liuhe Co. told investors in May that prices are likely to rise in the second half. 

“The upward trend in the hog market may continue,” said Wang Lingyun, an agriculture analyst at Shanghai Ganglian E-commerce Holdings Co. The drop in breeding capacity is the main price driver, while government purchases of pork for state reserves have also added upward pressure, she said.

Chinese pork prices plunged in the first nine months of last year amid a recovery in the hog supply after herds were decimated by African swine fever. Authorities asked producers to keep breeding sow numbers at a reasonable level in September. The move was an attempt to tame the boom-and-bust cycle in the industry, but appears to have spurred the current rally. 

As the number of breeding sows keeps falling, pork prices will become a major force driving inflation, China Merchants Securities Co. analyst Zhang Yiping said in a note this week.

Consumer prices in Asia’s largest economy rose 2.1% in April from a year earlier. That’s still low compared with the US and Europe, but an acceleration would pose a headache for the central bank, which is keen to loosen policy to mitigate the impact of a property market slump and the Covid Zero policy.

The CPI will increase 2.2% in May, according to a Bloomberg survey of economists. China might face stronger inflationary pressure in June due to rising hog and grain prices, said Lin Guofa, head of research at Bric Agriculture Group. 

Faster inflation is unlikely to have a big impact on monetary policy in the short term, however, as the priority is still on bolstering economic growth, said David Qu, an economist at Bloomberg Economics. 

Elevated costs for pig feeds such as soybean meal and corn may make it tougher for farmers to increase their herds. China may also be about to enter a new hog cycle, which could lead to a sustained upswing in prices. These patterns are driven by pig farmers adjusting herd numbers to react to prices, and they normally last around four years, with prices rising sharply in the earlier part, according to analysis by Nomura Holdings Inc.   

China is on the cusp of a new hog cycle, said Ming Ming, chief economist at Citic Securities Co. Pork prices are likely to surge next quarter, and if the wholesale prices surpass 30 yuan a kilogram that could push the consumer-price index above 3%, he said.

Source: Bloomberg

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