MNI: Pork Base Effects Add To China Disinflation Risks

Chinese pork prices, a key component of CPI, will continue to add to disinflationary pressures in the second half of the year as live pig prices rise moderately but fall short of last year’s seasonal highs, industry experts and economists told MNI.

China's Consumer Price Index fell by 0.3% y/y in July, turning negative for the first time since February 2021, with pork prices declining by 26%, compared to a 7.2% fall in June, National Bureau of Statistics data showed on Wednesday. CPI rose by 3.2% y/y in H1. Typically volatile, pork is the most food important item in CPI and accounts for about 2.5% of the total index basket.

While negative base effects on pork will continue to weigh on CPI, oil prices will provide support, said Julian Evans-Pritchard, head of China economics at Capital Economics.

“However, the risk of negative CPI for the second half of this year is real,” he cautioned. “It is really hard to see core inflation getting a big lift as long as demand remains this weak.”

Despite a slowdown in economic recovery this year, authorities will likely refrain from large-scale stimulus given that the 5% GDP growth target remains achievable, analysts and advisors have told MNI. (See MNI: China Seen Holding Off From Big Fiscal Stimulus - Bonds & Currency News | Market News)

Dong Lijuan, chief statistician at the NBS, said July’s negative y/y CPI was due to the high base from 2022's corresponding period, but month-on-month data was better with pork prices remaining stable.

LOWER PEAK

Pork prices could trend upwards throughout the second half driven by seasonal demand, however, the peak will fall significantly short of 2022’s high, said Zhu Zengyong, professor at the Chinese Academy of Agricultural Sciences, noting that the market remains oversupplied, with producers only marginally reducing capacity.

Live hog prices averaged CNY15.03 per/kg in H1, below the industry’s CNY16-17 breakeven point and down from 2022's CNY28 peak, according to Choice data (see chart).

Source: Choice Data

“With seasonal factors such as public holidays and cooler weather I see pork prices going above breakeven point in H2, but not by much, '' said Darin Friedrichs, co-founder at Shanghai-based agricultural research company Sitonia Consulting.

Pork retreated to CNY18/kg by the end of last year after the National Development and Reform Commission ordered producers to stop secondary fattening – which withholds supply.

Zhu expects significantly less secondary fattening this season, with market uncertainty and financial losses in H1 leaving producers wary of repeating last year’s tactics. Other factors, such as favourable production costs and stable pig numbers, make a price spike less likely, he added.

In response to low prices, the NDRC recently announced a second batch of central pork reserve collection, with its deputy director Li Hui, stressing the importance of pork-price stability at a press conference.