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China food inflation: pork is the make or break factor in controlling prices

In China, pork prices determine inflation. Meat is a local staple and has the largest weighting in food costs. A price rally that started earlier this year is continuing. Food manufacturers may have to pick up the expensive tab.

Pig prices have risen nearly 40 percent since March, pushing wholesale pork prices up by a fifth. That is a major impact on the economy. China consumes half of the world’s pork stock.

With lockdowns easing in key cities such as Shanghai, the increase in consumer demand should far outweigh the increase in supply due to normalization of factory and logistics operations.

For local pig producers and pork-related companies, including Muyuan Foods and Zhengbang Technology, this surge in demand is not necessarily a good thing. Grain prices have risen enormously, putting pressure on the margins through pig feed. Since last year, the decline in the number of breeding sows has accelerated.

Operating margins at pig producer Muyuan turned negative in the year to March, a sharp contrast to fat margins of more than 50 percent in 2020. Given the importance of pork prices in keeping inflation below the government ceiling of about 3 percent, it will be not easy for food companies to pass on rapidly rising costs to consumers – even without explicit pressure from Beijing.

Shares of local pig producers and pork-related companies have long been a stable source of returns. That is changing. Shares of Muyuan are down a quarter. Animal feed producer Zhengbang has fallen 54 percent in the past year due to rising costs. The latter was already operating on small single digit operating margins before the Russian invasion of Ukraine, which has since pushed up grain prices. Zhengbang now has negative margins that are much worse than Muyuan’s.

Consumer prices in China rose 2.1 percent in April. That’s low by US or UK standards, awash in stimulus money, but more than double the 18-month average. As energy and grain prices remain high, the current trend in pork prices could soon push Chinese inflation out of Beijing’s comfort zone.

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