China’s Rising Pork Imports Linked to Domestic Market Fluctuations

Prices, hog inventories and pork output in China fluctuate from year to year in response to various factors, according to Fred Gale, Daniel Marti and Dinghuan Hu in a report entitled China's Volatile Pork Markets from USDA's Economic Research Service.

15 February 2012

7 minute read

Abstract

With China’s emergence as a new source of potential demand for US pork exports, it is important for US farmers, business leaders, and policymakers to understand the volatile nature of China’s pork industry. Prices, hog inventories and pork output in China fluctuate from year to year in response to various factors that influence the market, and China’s imports of pork tend to rise when Chinese hog prices are high.

Extensive policy intervention by the Chinese government has contributed to consolidation in the country’s pork industry but has not stabilized the market. Imported pork is becoming more competitive in China as Chinese pork production costs rise and animal disease outbreaks, environmental threats, and food safety concerns constrain growth of China’s hog industry.

Introduction

China’s potential as a major pork importer presents opportunities for hog farmers, business leaders, and investors around the world. Articles and newsletters examining China’s effects on the global marketplace reflect buoyant optimism: "The long-run potential for US pork in China is enormous" (Hayes, 2010), and "The potential for further Chinese importation of pork is almost incomprehensible" (a hog industry observer quoted by Dyson (2008)). Announcements of pork sales to China can affect the US market. For example, in October 2009, the Wall Street Journal reported "China’s pledge to lift a ban on US pork drove prices of lean hogs to a three-month high on expectations of increased exports to the world’s largest pork consumer" (Cui and Waters, 2009).

As China begins to play a larger role in the world pork market, it is important for industry analysts, business leaders, and policymakers to understand the complex factors driving the Chinese hog/pork sector. China’s pork industry is constantly buffeted by a range of influences, including disease epidemics, feed prices, policy interventions, seasonal consumption patterns, demand for other meats, and macroeconomic factors. While much attention is focused on the upward trend in commodity prices, pork prices in China tend to rise and fall in multi-year cycles as the industry expands and contracts. The degree of volatility appears to have increased after record-high pork prices in 2007 prompted extensive government intervention and a surge in private investment accelerated structural change in the industry. Following a period of depressed prices in 2010, Chinese pork prices rose to new highs in 2011. China’s imports of pork fluctuated in a similar cyclical manner.

This report provides information on volatility in the Chinese pork industry. It reviews recent trends in China-Hong Kong pork imports and fluctuations in Chinese pork prices. It also analyzes the influences of rising feed costs, policy interventions, structural change, and disease epidemics on China’s pork industry. As increases in production costs, animal disease epidemics, animal waste disposal challenges, and food safety concerns limit the expansion of China’s domestic pork industry, the outlook for pork exports to China is favourable. However, volatility in China’s domestic market may result in similar volatility in export sales.

China’s Rising Pork Imports Linked to Domestic Market Fluctuations

China’s potential to affect the world pork market derives from the size and volatility of its domestic pork market. China accounts for nearly half of the world’s pork production and consumption. Its annual pork output is four to five times that of the United States and more than double that of the European Union. According to official Chinese statistics, China slaughters over 600 million hogs annually – one hog for every 2.2 Chinese people.

Historically, China has been a mostly self-sufficient pork economy. Mainland China traditionally imported modest amounts of pork offal and muscle meats and exported a similar amount of pork and live hogs to Hong Kong (a separate customs territory from mainland China). Some pork shipments from other countries to Hong Kong are re-exported to mainland China through ‘gray’ market channels, but the amount is unknown. While Hong Kong is a short distance from the country producing half of the world’s pork, most of the territory’s imports come from Europe, the United States, and Brazil. From 2000 to 2006, China and Hong Kong combined to import between 500,000 and 600,000 metric tons of pork and pork products annually. These amounts were a significant share of world pork trade but equated to less than one per cent of annual pork consumption in China-Hong Kong.

China and Hong Kong pork imports surged in 2007 when a shortfall in Chinese pork production led to record Chinese pork prices. That year, Hong Kong-China pork imports nearly doubled to just over one million metric tons (mmt), then rose to over 1.9mmt in 2008 (figure 1). According to the US Meat Export Federation, the 2008 total far surpassed the previous pork-import record of 1mmt set by Japan in 2005. In 2009, China-Hong Kong pork imports fell to about 1.5mmt – still nearly three times the pace of imports earlier in the decade – but rebounded to 1.8mmt in 2010. The 2010 import volume was equivalent to 3.6 per cent of China’s domestic pork output. The United States supplied about 20 per cent of China-Hong Kong pork imports in recent years.

For the US pork industry, China-Hong Kong has been one of the leading export markets since 2007. During the peak import period of 2008, US sales to the region accounted for over 18 per cent of US pork exports, about double the annual share exported to China-Hong Kong during 2000-2006.

Monthly statistics on mainland China’s pork trade reveal a link between imports and domestic pork prices (figure 2). High domestic prices during 2007-08 reflected short supplies in the Chinese market and prompted a surge in pork imports. The average domestic hog price in China doubled from about $.52 per pound in the first four months of 2007 to a peak of $1.08 per pound in April 2008. Monthly imports by mainland China grew rapidly as prices rose, reaching a peak of 119,000mt in June 2008, up from 15,000 to 30,000mt during 2004-06. Imports were boosted by a temporary cut in the country’s pork tariff and a state-owned company’s contract to purchase US pork to build up reserves ahead of the Olympic Games held in Beijing in August 2008.

After peaking in April 2008, Chinese pork prices fell until early 2009. China’s monthly pork imports also fell to under 40,000 mt during the first half of 2009. The decline in prices reached a low of $0.61 per pound in May 2009, about a year after the peak. A combination of factors helped drive down prices during this period: a build-up in production capacity that increased the domestic supply and a temporary decrease in demand due to concerns among Chinese consumers that the H1N1 influenza virus (swine flu) could be transmitted by eating pork. While no link between pork consumption and H1N1 transmission was scientifically established, Chinese authorities still banned imports of pork from North America to prevent the spread of the disease to China. The ban remained in place for the remainder of 2009 and stopped direct imports of US pork for nearly a year until June 2010.

Chinese pork prices began another run of monthly increases in the second half of 2010 and reached new highs during 2011, three years after the sharp increase in prices during 2007-08. With domestic pork prices rising, less expensive foreign pork was more competitive in the Chinese market. Chinese customs statistics revealed that China’s monthly pork imports during late 2010 and 2011 surpassed the record pace set in 2008, rising as high as 150,000mt during September 2011 (see figure 2). Imports from the United States accounted for most of the import growth during 2011.