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Author Topic: Chinas Pork Problem  (Read 351 times)
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mikey
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« on: March 19, 2008, 11:22:04 AM »

China's Pork Problem
  By LIZ PEEK
May 31, 2007
A D V E R T I S E M E N T
 
 
A D V E R T I S E M E N T
 
China has a pork problem. (America has one, too, but ours is confined to the halls of Congress.) It appears that millions of China's estimated half billion pigs are dying of a mysterious ailment called "blue ear," as well as the more prosaic hoof and mouth disease, the Financial Times reports.

The upshot of this pig plague is a near-30% rise in pork prices and an even bigger jump in the price of pigs. This hits China's population hard, since pork is a staple of the local diet, notwithstanding recent incursions by Western food vendors.

The good news is that China has planned ahead for such a crisis. It apparently set up a "strategic pork reserve" in the late 1990s to offset an acute shortage or rapidly rising prices. I cannot imagine what shape such a reserve would take, and I prefer not to, but apparently the presence of the stockpile is providing some cushion.

Why do we care about this distant problem? For starters, some analysts project that inflation in China will have risen to around 4% from 3% in the most recent month. Along with all its other exports, China is in an excellent position to export inflation, as well.

Also, it may astonish you to know that pork is the no. 1 meat of choice around the world, Dave Warner at the National Pork Producers Council here in America says. In fact, some 44% of the world's protein intake comes from pork. Concerns about avian flu have had an impact on demand for poultry in many countries, and outbreaks of mad cow disease similarly have curbed the appetite for beef. Consequently, pork is an increasingly important element in the world's shopping cart, and a rapid rise in price could wreak havoc with spending in other areas.

Further, China accounts for about half the world's pork production and consumption. It mainly feeds its own market, so it has not been a big exporter or importer. That could change, and with it the outlook for American meat suppliers.

A leading economist in the area is Steve Meyer, who runs a company called Paragon Economics. Mr. Meyer has long expected that China could become an important market. "I've thought that we might start exporting byproducts, especially, to the Chinese," he says. "Organ meats are looked upon favorably by the Chinese, and they are not viewed as attractive here."

It is not only China that is paying more for pork, Mr. Meyer says. Pork prices here in America are up about 10% over last year's level, but the rising cost of corn means that many, if not most, producers are hovering around breakeven.

The use of ethanol as a fuel has lifted corn prices to around $3.50 a bushel from about $2 a year ago. In some parts of the country, Mr. Warner says, it is virtually impossible to buy corn. Overall, the cost of raising a pig is up about 30% since last year. This trend is likely to get worse, as there are some 50 to 60 ethanol plants under construction, Mr. Warner says. Because the government is subsidizing the use of ethanol, demand will continue to grow, making life tougher for farmers reliant on corn for feedstock

Pork producers will be eager to pass through these higher costs, and rising demand from export markets may allow them to do so. A commodities analyst with Commodity & Ingredient Hedging, Dave Ward, hopes that will be the case. He helps his clients manage their price risk. Chinese shortfall could have an impact on world markets, he says. "Demand will have to be filled from somewhere," he says. "So far, though, the market is not acting like it."

Over the past month futures prices have trended slightly lower for pork, a spokesman for the Chicago Mercantile Exchange says. That could be because the Chinese problems do not appear to have been much reported in the middle of the country and because the industry appears to focus mainly on domestic markets.

Still, "prices are already high historically," Mr. Ward says. "Export demand is helping, especially from Mexico and Japan." America, with a pig population of some 100 million, doesn't even come close to matching China's industry, but we are the preferred supplier to Japan because of the quality control of our industry, and we will soon be a major exporter to South Korea, as a result of a new trade agreement.

America lags behind the European Union collectively as a pork exporter, but we are a significant participant in world markets. "We have a technological advantage," Mr. Meyer says. "We have excellent packers and are very competitive, especially with the weak dollar."

Overall, Mr. Meyer has been expecting the 50-year 1 1/2% growth rate for American pork production to continue. Per capita annual consumption in America has hovered around 50 pounds (how many hot dogs a day is that?) for the past 40 years, and he says he doubts there will be much movement there. With prices having been relatively high for some time, he has been expecting producers to cut output, thus incurring a five-year hiatus in growth. The export market, though, could give the industry a lift.

In any case, as Asian countries become more prosperous, it is expected that the consumption of protein worldwide will continue to increase, which should further benefit American meat producers. If China's problems persist, we could see an acceleration in demand, benefiting our producers such as Swift, which is privately owned, Hormel (HRL $37), Tyson (TSN $22), and Smithfield (SFD $32).
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