China meals inflation: pork is the make or break think about controlling costs


In China, pork costs decide inflation charges. The meat is an area staple and has the biggest weighting in meals prices. A worth rally that began earlier this yr is continuous. Food producers could have to select up the dear tab.

Hog costs have risen almost 40 per cent since March, pushing wholesale pork costs up a fifth. That is a huge impact on the economic system. China consumes half the world’s provide of pork.

As lockdowns in key cities such as Shanghai ease, the pick-up in consumer demand should far outpace the increase in supply that would come from normalising operations at factories and in logistics.

Stacked bar dosplaying China consumer price index weights, %

For local hog producers and pork-related companies, including Muyuan Foods and Zhengbang Technology, this surge in demand is not necessarily a good thing. Grain prices have soared, adding pressure to margins via pig feed. A decline in the number of breeding sows has accelerated since last year.

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

Line chart showing Purchasing managers indices. Global food product input costs and selling price

Shares of local hog producers and pork-related companies have long been a stable source of returns. That is changing. Shares of Muyuan are down a quarter. Feedstuffs maker Zhengbang has fallen 54 per cent in the past year, reflecting rising costs. The latter already operated on slim single-digit operating margins before Russia’s invasion of Ukraine, which has since pushed up grain costs. Zhengbang now runs on adverse margins far worse than these of Muyuan.

China’s shopper costs rose 2.1 per cent in April. That is low by the requirements of the US or UK, awash with stimulus cash, however greater than double the 18-month common. As costs of power and grains stay excessive, the present development in pork costs might quickly push China’s inflation out of Beijing’s consolation zone.

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