Falling pork prices could push China back into deflation

Wholesale pork prices in CHINA are down more than 40% from last year. Economists say the fall in the cost of pork, given its heavy weight in China's official consumer price index , is likely to push the country back into deflation.

“Consumer inflation looks set to turn negative again in October, and the main reason for this appears to be the decline in food inflation driven by falling pork prices,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

A return to deflation - after anemic growth in August and flat CPI in September - would undermine officials' efforts to restore confidence in China's economy, which remains fragile due to weak consumer confidence and a liquidity crisis in the country's real estate sector.  

The price of pork in China, the world's largest producer and consumer of the MEAT, has long been subject to a boom-and-bust cycle as smaller farmers enter the market in response to rising demand. This leads to oversupply and plummeting prices, forcing those same farmers to retreat. Beijing has sought to tighten its control over this cycle by concentrating more production in a few large agricultural enterprises. However, this year the same producers have exacerbated the price decline.

Pork prices began rising in July - partly in response to government-led purchases - but then fell again as major producers including Muyuan and New Hope decided not to cut capacity despite a broader decline in demand. Large producers typically reduce production by selling breeding sows and buying fewer piglets to raise until demand pushes prices back up. But piglet prices in China are down just 10% from last year, suggesting demand for young animals remains relatively strong even as pork prices have fallen much more.

Analysts said the strategy paid off last year when a rebound in pork prices in the fourth quarter - as China eased tough covid restrictions - ultimately helped top producers boost earnings at the expense of small farmers who had been forced out of the market .

Darin Friedrichs, DIRECTOR of market research at Sitonia Consulting in Shanghai, said China's major pork producers are pursuing the same strategy this year, but there is no sign of an imminent demand recovery in the fourth quarter.

“It looks like they’re just trying to hang in there again,” Friedrichs said. “But some pork producers are selling subsidiaries or forcing executives to buy back shares. This indicates that they are under greater financial pressure.”

Shares in Muyuan, the world's largest pig producer, have fallen more than 20 percent this year, even after executives last month announced a share buyback of about 1 billion yuan ($137 million). The company was recently forced to cancel a planned share sale in Zurich, blaming unspecified “objective factors” in a filing to the Shenzhen Stock Exchange.

“Part of the problem is that many of these large companies have, at some level, become resigned to the boom and bust cycle,” Friedrichs said. “And they think they play the game better than their competitors.”