Rising Prices and Costs for Chinese Pork

Rising prices in China’s domestic pork market were the main contributor to the country’s rising pork imports, write Fred Gale, Daniel Marti and Dinghuan Hu in a report entitled ‘China’s Volatile Pork Industry’ from the USDA Economic Research Service.

23 February 2012

9 minute read

From 1991 to 2006, Chinese hog prices fluctuated within a relatively narrow range of $0.30 per pound to $0.50 per pound and were usually less than US prices (figure 3). After a sharp increase during 2007-08, however, Chinese hog prices have been significantly higher than US hog prices. While Chinese hog prices fell sharply after peaking in 2008, the average price during 2007-10 ($0.79 per pound) was more than double the average in 1991-2006 ($0.37 per pound). During 2011, prices rose as high as $1.40 per pound.

The shift in prices is an indication of the general improvement of prospects for US pork sales to China. To be cost-competitive in China, however, US pork must be comparable in cost or cheaper than Chinese pork after accounting for freight costs, tariffs (12-20 per cent), and value-added taxes (13-17 per cent). Overall, the authors estimate that prices in the Chinese market would have to be approximately 30 to 45 per cent higher than US prices for US pork to be cost–competitive in China.

US and Chinese consumers have complementary tastes that encourage pork trade between the two countries. US consumers prefer muscle meats, while Chinese consumers prefer offal and variety meats that have low value in the United States (Hayes and Clemens, 1997; Fabiosa et al., 2005). As a reflection of these differing preferences, price competitiveness varies for different cuts of pork. In 2011, the average US prices of livers, hearts, hocks, feet, kidneys and tails were less than half the prices of corresponding parts in a Beijing wholesale market (figure 4).

Prices of all cuts tend to rise and fall to reflect general changes in pork prices, and in 2011, the rise in Chinese hog prices drove the prices of both muscle meats and variety meats well above corresponding US prices. For example, the price of a lean carcass in Beijing was about $70 higher than the US carcass price of about $91 per 100lbs. A year earlier, carcass prices had been nearly equal in the two countries. In mid-2011, muscle meat prices were also relatively high in China. The Beijing price of hams was more than double the US price, the price of spare ribs was nearly 50 per cent higher, and the price of bellies was nearly 40 per cent higher. Variety meats constitute most of the US pork exported to China, but the widening difference in prices improves the prospects for US muscle meats to be competitive in China.

High pork prices in China likely stem from the rising costs of hog production in China. ERS analysis of data from China’s National Development and Reform Commission (NDRC) shows that average hog production costs, converted to US dollars, more than doubled from 2002 to 2009. Chinese hog production costs per pound of live weight rose from about $0.30 in 2002 to $0.71 in 2010 (figure 5). Feed is the largest of the hog production expenses in China, accounting for about 60 per cent of the total. Feed costs rose from $0.18 per pound in 2002 to $0.25 per pound in 2006. In 2010, the feed cost rose to $0.44 per pound, an increase of 77 per cent from 2006. The cost of a feeder pig more than doubled during 2002-10 as well.⁴ Estimates of hog production costs for 2011 were not available when this report was prepared but with corn prices rising, it is likely that feed costs rose further in 2011.

Labour and other expenses may have more of an impact on hog production costs than is indicated in figure 5. China’s vibrant labor market and an increase in school attendance have absorbed slack household labor that was traditionally used for small-scale ‘backyard’ hog production. According to industry reports, the number of rural households raising hogs has been in decline since 2007. And as these small-scale farms exit the industry, they are increasingly being replaced by larger commercial-scale farms operated by companies or farmers who specialize in raising hogs.⁵ Compared with small farms, commercial-scale farms have higher overhead costs for housing, equipment, and manure treatment; they purchase higher value breeds of feeder pigs; and they use paid laborers and technicians instead of relying on unpaid family labour. Commercial-scale farms purchase commercial feeds, while small-scale farms use inexpensive crop stalks, bran and hulls from grains, food scraps, and forages.

The increase in feed costs has pushed Chinese hog production costs above those of the United States. Based on data from China and US production cost surveys for 2009, US hog producers had significantly lower costs per pound of live hog weight ($0.57) than commercial-scale hog producers in China ($0.68) and ‘backyard’ producers in China ($0.70) (figure 6). The US cost advantage was mostly due to lower feed expenses and may be a reflection of a more efficient conversion of feed to meat as well as lower feed prices. Even the Chinese cost advantage in feeder pig prices observed in 2002 by Fabiosa et al. (2005) was reversed after the increase in feeder pig prices during 2007. The Chinese surveys may understate costs of commercial-scale producers by excluding very large 10,000-head farms that are becoming more common in China. These farms have overhead costs that may be comparable to the relatively high ‘other’ costs shown for US farms in figure 6.

Grain prices in China have been rising due to the scarcity of cropland and surging demand for grain by feed mills and industrial users. Chinese hog producers and feed mills pay much higher prices for corn than do their US counterparts, and in recent years, rising corn prices have pushed China’s feed expenses higher. Rising feed prices tend to push hog and pork prices upward as well.

While the Chinese pork industry still uses a wide variety of feeds, Chinese market analysts focus on the price of corn as an indicator of feed costs (see below, ‘Wide Variety of Feeds Used’). When high corn prices raise the cost of producing pork in China, industry members may take two approaches to alleviate the cost pressure on Chinese consumers: (1) import corn from the United States or other countries with lower corn prices to reduce the cost of producing pork in China, or (2) import pork produced in countries with lower feed costs. While pork production costs are also rising in the United States, US feed costs remain lower than in China because the United States has more abundant land, water and grain resources. Meeting Chinese demand for pork by producing hogs near sources of feed in the United States and then exporting pork to China is more cost-efficient than exporting large volumes of grain and oilseeds to produce pork in China (Hayes and Clemens, 1997).

The difference between corn costs in China and those in the United States varies from year to year. Corn prices have generally been rising and are higher in China, but surging US corn prices during 2007-08 and 2010-11 narrowed the gap. A comparison of the monthly average cash prices of corn in Guangdong Province and central Illinois during 2005-10 provides evidence of the cost differential (figure 7).⁶ The Guangdong corn price increased from about $150 per metric ton to over $300 in late 2010. The price of corn in central Illinois was consistently lower than the price in Guangdong, but the difference between the two fluctuated throughout the five-year period. In early 2010, the Illinois price was less than half the Guangdong price. The large price difference during mid-2010 stimulated China’s first significant corn imports from the United States since the 1990s. (As noted earlier, China’s pork imports were also robust during 2010.) US corn sales to China came to a standstill as US corn prices rose and the corn-price difference narrowed later in 2010. However, the Illinois corn price was still 20 percent below the Guangdong price in February 2011.

Wide Variety of Feeds Used

A standard Chinese hog feed ration includes about 60 per cent corn and 15 per cent soybean meal. However, the composition of feed can vary widely across farms. Moreover, feed formulations can vary dramatically by region, by farm size and over time. Chinese farmers have traditionally fed pigs locally available grains, wheat bran, rice hulls, crop residues, vines, potatoes, food scraps and byproducts from agricultural processors.

The composition of feed depends on the types of materials that are available locally at low cost. Farmers often mix these materials with commercial concentrate feeds that contain soymeal, other protein meals, amino acids, vitamins and trace elements. An increasing number of farmers use commercial formula feeds that include various combinations of the above items already mixed together. Based on interviews with farmers in Sichuan Province, the proportion of corn in hog feed ranges from 30 to 70 per cent, while the proportion of commercial concentrate feeds varies from 10 to 20 per cent. Commercial-scale farms account for an increasing share of hog production in China and tend to use a higher proportion of corn and commercial feeds than do smaller farms.

Footnotes

⁴ Chinese feeder pig prices follow an even more pronounced cyclical pattern than do pork and live hog prices. Feeder pig prices rise during periods of industry expansion and fall when farms are cutting back on production.
⁵ Data from the China Ministry of Agriculture Livestock Industry Yearbook indicate that approximately half of hogs slaughtered in China in 2010 came from ‘backyard’ farms raising fewer than 50 hogs per year.
⁶ Guangdong Province is a major hog-producing area in southern China, and it has the largest output of commercial animal feed of any province in China. Corn prices in Guangdong are among the highest in China because little corn is produced there. Several million metric tons of corn are shipped from northeastern China to Guangdong each year.