Author: Huang Zhilong

Source: SUNING Wealth Information

Chinese pork and South Korean kimchi have always been weather vane of domestic inflation.

After the Spring Festival this year, there has been a rare surge in pork prices in the traditional off-season of pork demand, does this mean that the pig cycle that has often been a headache for the central bank is coming? How much impact will pork prices have on inflation and monetary policy this year? Take a look at the following analysis.

1 Pork prices soar after the Spring Festival

First of all, let's take a look at the rise in pork prices after the Spring Festival.

Compared with the low at the end of January (10.8 yuan / kg), the national pig price reached 15.2 yuan / kg on March 20, an increase of more than 40%. Pork prices in 22 provinces and cities also rose from 18.54 yuan / kg to 22.1 yuan / kg, an increase of nearly 20% (see chart below).

2 Two factors push up pig prices

Why do pork prices rise sharply in the off-season after the Spring Festival? There are two main reasons:

First, African swine fever has led to the rapid clearance of pig production capacity.

Since the first case of African classical swine fever was discovered in August 2018, there have been 114 cases of African classical swine fever in 28 provinces in China, and nearly 1 million pigs have been killed.

More importantly, the continuous fermentation of the epidemic has seriously affected the expectations of farmers' sows and pigs, accelerating the decline of production capacity in the pig farming industry.

At the end of February this year, the stock of fertile sows across the country fell by 13.5% from before the outbreak, and the year-on-year growth rate was the lowest since 2009 (- 19.8%).

The elimination process of fertile sows has been accelerated, resulting in a serious shortage of piglets. Piglet prices have risen sharply by 100% since February. At the same time, the stock of live pigs at the end of February has also dropped 17% year-on-year, a new low in recent years (see chart below).

According to the forecast of Huitong data Research Department, the impact of African classical swine fever will reduce the national pig farming capacity by 15% and 20% in 2019.

Although African classical swine fever is a short-term factor, its boost to pork prices after the Spring Festival is obvious. "Pig prices are expected to rise significantly after the third quarter, especially in the fourth quarter," the Ministry of Agriculture and villages said at a news conference on African classical swine fever on March 1. But in fact, the impact of the epidemic on pig prices is faster and more intense than expected.

Second, the imbalance between supply and demand of pork is becoming more and more prominent in the medium term.

From the perspective of pork demand, the national demand for pork has been relatively stable. The China Agriculture Outlook report (2015-2024) released by the Ministry of Agriculture predicts that China's pork consumption and per capita share will maintain a steady annual growth rate of 1.3% and 0.8% in the next 10 years. Pork per capita consumption will be 42 kg in 2015 and will rise slightly to 45 kg in 2024.

In contrast to the steady demand for pork, the supply and output of pork fluctuate sharply and become the dominant factor affecting pork prices.

In 2018, national pork production fell back into the range of negative growth, down 0.9% from the previous year, and the decline in the first quarter of this year is expected to be even greater, which is the main factor driving up pig prices at a later stage.

3 The rise in pig prices will not ease in the short term.

Of course, pig prices have continued to rise since March, which is also related to the state's early launch of pork collection and storage operations. At the same time, farmers hold down the fence to cherish the sale, the supply of pigs in various places continues to be tight, and farmers' voice and bargaining power are enhanced, which are also factors for the rise in pig prices.

It is worth mentioning that although there is a certain degree of substitution between pork and other meat products such as beef, chicken and mutton, the data show that in the past two decades, the proportion of pork in all meat consumption has always been within the range of 71% Muk 74%, which shows that this substitution is very limited. On the contrary, the rise in pork prices often drives up the prices of beef, mutton, chicken and other meats. therefore,It is unrealistic to expect other meat to replace pork to ease the upward pressure on pork prices.

4 Will inflation rise significantly?

Although the current rise in pork prices is due to the short-term impact of African classical swine fever, the imbalance between supply and demand of pork is actually the dominant factor. The following picture may reveal this answer.

From the historical data, the pig production lags behind the change of sow stock, about 12 months. As a result, the stock of fertile sows that began to decline sharply in the second half of 2018 compared with the same period last year will have a greater impact on pig production and pork production in 2019, which is also the main reason why the Ministry of Agriculture pointed out that "pork prices are under great upward pressure in the third quarter of this year." However, the reality is that the impact is faster and faster than expected.

So how much impact will this round of rising pork have on inflation?

It depends on the room for rising pork prices. As mentioned earlier, considering that classical swine fever accelerates the decline of the current stock of sows and live pigs, the pace and magnitude of the pig cycle will rise faster than expected.

According to historical experience, the pork rising cycle will last about 15-20 months, including a wait-and-see period of 3-5 months for farmers and a 12-15 month time for sows to fill fences, raise young and live pigs. According to this calculation, the peak of this round of pork prices will appear in the first or second quarter of next year, of which the possibility of breaking through the previous highs around the Spring Festival in 2020 is not low.

Accordingly, Haitong predicts that pork prices will reach about 33 yuan / kg in the first quarter of next year, with an average increase of about 40% in the coming year, and the year-on-year pulling effect on CPI will be about 0.7%, including 1% in the first quarter of 2020.

In a word, the rise in pig prices will lead to a significant rise in inflation, which will pose an important constraint on the looser monetary policy and the goal of stable growth in 2019.