| FOCUS 23/10/2018 2
Food prices make up 25% of CPI inflation basket.
In terms of weighting, food prices now account for
roughly a quarter of China’s CPI inflation basket, having
fallen from about a third 10 years ago on the back of the
longstanding trend of consumption upgrading. Given their
high volatility though, food prices have been the dominant
driver of headline CPI inflation in China.
As regards price volatility, pork and vegetables, both of
which are highly susceptible to supply shocks, are the
most volatile.
Pork accounts for c.10% of food prices and 2.5% of
CPI basket. In outlier years, though, the pork price could
rise by as much as 48% y/y (ie, in 2007) or drop by as
much as 19% y/y, as happened in 2009. This explains
why CPI inflation was nicknamed the China Pork Index in
China.
In August, Shenyang City of Liaoning Province reported
the first case of ASF, a deadly disease for pigs that has
no cure. Pigs infected by the disease must be
slaughtered. So far, ASF has broken out in 10 provinces,
concentrated in North-east China and along the Yangtze
River Delta. The number of pigs infected is less than
100k, which is tiny comparedto the country’s pig stock
(429m).
Government measures to prevent ASF’s spread
drove up pork prices in August and September.
Northern China is the country’s main pork producer while
southern China is the major consumer. After the
outbreak, the government quarantined the infected areas.
As a result, pork prices in northern China, particularly
north-east China, have markedly declined due to the
resulting supply glut, while prices in southern China have
jumped given the supply shortage. On average,
nationwide pork prices increased by 10.4% in August-
September.
Food inflation vulnerable to supply shocks
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Fig. 3: Pork prices have picked up due to ASF Fig. 4: Vegetable prices trending up
Sources: China’s National Bureau of Statistics, BNP Paribas
Note: hog-to-core ratio at 6x is the breakeven level for pig farming.
Sources: Wind Financials, BNP Paribas
ASF’s impact on pork prices ultimately depends on
how widespread and how long it is. If the disease
spreads, this would reduce the stock of both hogs and
sows; the latter would have a far-reaching negative
impact on pork supply in the next year or two. In addition,
if the diseases persists, farmers in infected areas would
again reduce capacity amid economic losses, which, in
turn, would hit supply in the next two years.
On the plus side, if ASF is contained successfully, we
believe pork prices will start to fall after the Spring
Festival next February.
Sow stock the most important determinant in China’s
hog price cycle. Sow stocks normally lead pork supply,
which is determined by the pork production cycle, by
12-13 months. At over RMB1,700/head, sow prices are
currently well above the RMB1,500 breakeven level,
indicating de-stocking has not taken place. Barring
significant disruptions from ASF therefore, pork supply
should not be a problem next year.
Vegetable prices on the rise. Vegetable planting is
labour intensive and labour costs have been rising
rapidly. However, in the short term, unfavourable weather
and natural disasters can severely disrupt vegetable
production and push up prices.
Vegetable prices spiked 9.0% m/m and 9.8% m/m in
August and September, respectively, on the back of
flooding in Shouguang, a major vegetable production
area in northern China, and extreme weather in some
regions. That said, the vegetable production cycle is
relatively short, and supply can be easily restored in 2-4
months for most types of vegetable.
Barring a significant deterioration in ASF and
extreme weather, we don’t expect food inflation to
get out of control.。