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China bracing itself for soaring prices

Publication Date : 11-08-2012

 

Cai Xiaoqin, 38, has been cooking pork for every meal in the past month.

"Prices have fallen so we can afford to eat pork again. It's quite a relief after seeing prices rise so high last year," said Cai, a house cleaner in Beijing. She recalled prices of the staple meat in China jumping 57 per cent in July last year.

Last month, prices fell 18.7 per cent amid pork over-production, the second month of decline.

But with the worst dry spell in 50 years in the United States threatening the soya bean and corn crops that China relies on heavily to feed its pigs, it is unclear how much longer pork prices can stay low.

As the world's largest importer of US agricultural products, China is bracing itself for soaring prices. These could jack up politically sensitive food inflation in China - where food makes up 30 per cent of its consumer price index basket - and limit Beijing's efforts to introduce easing measures to stimulate the slowing economy. But so far, the impact has been limited, and Beijing's measures to manage food supplies and costs may shield Chinese consumers from huge price spikes.

"The government definitely hopes to keep food prices even, because this affects people's livelihoods," said Monica Tu, an analyst with Shanghai JC Intelligence, a grain industry consultancy.

With the once-in-a-decade leadership transition taking place as early as October, China's leaders are eager to ensure stability on all fronts. They will not have forgotten that a global spike in food prices from 2007 to 2008 sparked riots in countries from Egypt to Haiti and Bangladesh.

This time, while prices have surged, they have not hit record highs. And governments have not restricted food exports as they did three years ago. Since mid-June, prices of one-month futures - which are contracts to buy a commodity at a certain price at a future date - of soya bean, corn and wheat have climbed about 17, 37 and 46 per cent, respectively, on the Chicago Mercantile Exchange.

This comes as American soya bean stocks are forecast to shrink to a 30-year low this year, while corn yield could drop to its smallest in five years. In contrast, China's domestic futures for corn and wheat have risen by 4.7 per cent and 5.4 per cent, thanks to its self-sufficiency in these two crops.

But soy is a different matter. China imports 80 per cent of its soya bean consumption, of which roughly one-third comes from the US. And Chinese pig farmers are estimated to account for 60 per cent of the soya bean traded across the world.

With demand for meat from China's increasingly affluent population on the rise, domestic soy futures prices rose by roughly 10 per cent over the past seven weeks. And soymeal for pigs surged to a record high of 4,048 yuan (US$639) a tonne earlier this month, according to a Reuters report.

And there are more price increases to come. "From August to November, it looks like overall soy imports to China will continue to fall... prices in the second half of this year will rise," said Tu.

Pork prices could go back up soon, though any rebound will be limited by government measures.

"China has recently launched measures to increase pork reserves, as pork production levels have been at a relatively high level," noted Tu.

If supply shrinks later, the government can release more stock to stabilise prices.

Last month, Beijing took steps to contain the prices of cooking oil, including corn and soya bean oil. It advised producers to avoid raising prices "unless absolutely necessary", the Wall Street Journal reported, quoting producer Wilmar International.

On top of this, China has been trying to reduce its reliance on the US. Earlier this year, it signed import deals with Ukraine and Argentina, which could augment corn supplies by a few million tonnes in the coming years. At home, China has enjoyed its seventh record corn harvest in eight years. The prospects this year look good too.

"Domestic corn prices may not surge as weather conditions in north-east China, the major corn-producing area in China, have been favourable," Bank of America Merrill Lynch analysts wrote in a report on Wednesday. "The surge in US grain prices will have limited impact on China's food inflation."

 

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