Peak Pork in China or Business Cycle as Usual?

21 October 2016

China, the world’s largest consumer and producer of pork, has been the source of turmoil in the global pork market in the last few years. Industry transformation from many small-scale pig farmers to fewer, large-scale producers has pushed many players out of production, leading to a contraction in stock quantity of 25 million hogs from 2013 to 2016. With fewer hogs (the name for pigs bred for slaughter) in China, industry analysts expected pork exports to the country to boom, but after a brief spike in May 2016, Chinese pork imports have declined. The US is one of China’s largest sources of pork imports; after the sudden drop in Chinese demand, the US has found itself with the largest hog herd since 1943.

After a rapid rise since the 1970s, Chinese pork consumption has consecutively fallen in 2015 and 2016, the first time that the figure has declined two years in a row. In addition, Chinese consumers are more interested in other meat sources, including beef and chicken, as their income rises. Could it be that China has experienced peak pork, or is market volatility to blame for the fall in consumption?

Global Pork Consumption
China is by far the world's largest consumer of pork

Although the decline is significant, it may be too early to predict peak pork in China. Pork is still by far the most popular meat, and unlikely to continue declining, even though its growth is expected to be slower relative to chicken, beef, and lamb/mutton. Furthermore, this latest price spike should further motivate government efforts to stabilize the industry’s long-term volatility (which has included the push to consolidate producers as well as the creation of a strategic pork reserve).

Background

Pigs and pork have been significant in China for thousands of years. A symbol of fertility and prosperity, the animals have long been celebrated in Chinese literature, music, and art. Pigs are one of twelve animals of the Chinese zodiac, and the written Chinese character for “home” is a pig under a roof. Pork is so ubiquitous that the words for “meat” and “pork” are interchangeable.

Pigs have other uses beyond food in China. Mao called them “walking fertilizer plants,” because they’re able to eat up and digest nearly any type of food scraps or household waste. Not only do they eat a broad range of foods, they’re also efficient at turning food to energy; they can convert about 35 percent of calories consumed into meat, while sheep and cattle are limited to 13 and 6.5 percent, respectively. (Meanwhile, none can compare with the highly efficient catfish, which can convert above 50 percent of calories to live weight.)

Global size of hog herds
China has over half of the world's supply of hogs

Given the deep significance of pork in China, it’s no surprise that pork production and consumption has skyrocketed since Chinese agriculture liberalized in the 1970s. Domestic consumption has grown about eightfold from 1975 to 2016. As China rapidly developed, pork went from being an occasional luxury to a regular staple. Per capita pork consumption has grown more than fourfold since 1979, and China has recently surpassed the EU as the world’s largest per capita consumer of the meat, in spite of the fact that the EU’s per capita GDP is far higher than that of China’s.

Chinese, US Per Capita Pork Consumption
China has surpassed the US and Europe to be the top consumer of pork per capita

It’s not just a matter of culture—pork significantly affects the Chinese financial economy as well as the government’s policies. The commodity is a significant component of China’s consumer price index and can be a major driver of inflation. Its influence is so significant, both as a staple food and as part of the financial economy, that the Chinese government has instituted various measures to stabilize pork prices. One of these includes the establishment of the world’s first and only pork reserve, which buys up pork if it falls below a certain price threshold and releases it to the market if it rises above another. Chatham House has estimated that Chinese pork subsidies added up to $22 billion in 2012, or about $47 per hog.

Volatility in Chinese pork production

Despite government attempts to minimize fluctuations in this market, volatility is in general typical in livestock production industries. Changes in feed prices, seasonal consumption patterns, disease outbreaks, and macroeconomic trends all contribute to price fluctuations. But meat from livestock production is especially volatile because it has a long production cycle, making it difficult for producers to respond quickly to demand. In China it takes about 18 to 20 months for a generation of gilts (young female hogs that haven’t given birth) to reach breeding age and produce a new crop of hogs, which will in turn be raised and slaughtered. When prices are sufficiently high, domestic suppliers import from foreign producers, especially the United States. Consequently, domestic hog prices and imports tend to be highly correlated.

China imports more pigs as prices rise
China imports a lot more pork when prices rise

Because China is by far the world’s largest consumer of pork, changes in pork demand in China also send shockwaves far and wide, beyond fluctuations in inflation of the yuan and the price of the Chinese food basket. In 2011 for example, during a shortage, US exports to China and Hong Kong more than doubled from their 2010 value, increasing from 163,000 tonnes in 2010 to 370,000 tonnes in 2011. This increase alone caused China and Hong Kong’s share in US pork exports to jump from 8.5 percent to 15.7 percent in the course of a year.

In spite of government efforts, events of the past two years give some indication that the pork market in China still hasn’t quite stabilized. Although government policies have tried to reduce fluctuations, the industry has significantly contracted. Stocks of hogs have fallen from 476 million in 2013 to 451 million in 2016, a decrease of more than 5 percent.

Chinese hog production and herd size
China's hog production has significantly increased, but recently declined. N.B. The decline in 1994-1996 is due to a change in Chinese statistical methods.

These changes affect global markets. Chinese pork prices skyrocketed in early 2016 in response to declining stocks, increasing 28.4 percent year-over-year in March. In response, the government began to release its pork reserves on the market to ease the prices, but without significant success. In the meantime, domestic sourcers turned to cheaper pork from the United States. US pork exports to China averaged 9,300 tonnes a month (carcass weight) through 2015, but soon started climbing rapidly in 2016, reaching 33,000 tonnes in May 2016. It subsequently collapsed to 13,000 tonnes by August (latest data available), as Chinese hog stocks recovered.

The sudden demand drop-off caught US producers off guard, creating an oversupply in the US. The trend has been exacerbated by the falling value of the Mexican peso, decreasing imports to a country that has typically been a larger buyer than China. The result was a glut of hogs, with US herd numbers reaching heights that haven’t been seen since the 1940s. Hog futures subsequently plummeted and have become the worst-performing raw material commodity futures of 2016.

Size of US hog herd
The size of the US hog herd is the highest since 1943

Long-term trends in Chinese pork consumption

Chinese imports of US pork has grown in recent years, in recognition of high quality and stable supply. Many US producers rely on ractopamine, a feed additive that increases meat leanness; unfortunately for them, China bans ractopamine. To access the enormous Chinese market, more and more US pork producers have eliminated the use of the additive. Perhaps it shouldn’t be surprising that the biggest Chinese takeover of an American company was one involving pork; the $4.7 billion acquisition of Smithfield Foods, the world’s largest pork producer, by Shuanghui Holdings (later renamed WH Group), China’s largest meat processor, was completed in 2013.

The continual volatility in the industry for the past few years a symptom of an industry still in transition. In 2007, an outbreak of blue ear pig disease caused the death of an estimated 45 million hogs in China, causing a major supply shortage and price spike. Since then, the Chinese government has attempted a series of reforms to the industry in an effort to transform it from a fragmented industry full of small, household producers to a modern, large-scale livestock industry. Small-scale, backyard producers came to be seen as a threat to industry stability, unable to properly prevent disease outbreaks and more likely to slaughter breeding sows during dips in the market. Subsequent policy reforms in the form of subsidies for larger producers began to push smaller players out of the industry, replacing them with larger operations that were more standardized and industrialized. Another policy created the strategic pork reserve, which has exercised its power to release pork when prices were high. Nonetheless, these policies have not prevented various price hikes, including one in the first half of 2016.

Chinese consumption of pork, chicken, and beef
Pork still dominates the Chinese meat diet, but chicken and beef are forecast to grow more quickly in the next decade.

In addition to a transition in industry structure and government interventions, demand for pork in China is also shifting. While pork is still the most-consumed meat in China, domestic consumption of pork started to fall in 2014 as other meat sources have gradually become more popular, especially among higher-income consumers. Just as hog stocks have fallen in the past two years, domestic consumption of pork in China has fallen for two years straight in 2015 and 2016, a sign that China’s demand for pork may be starting to cool. The OECD has forecasted that from 2015 to 2025 per capita pork consumption in China will have the slowest growth rate among the four major meats. Pork consumption is expected to grow 1.0 percent, compared to 1.3 percent for chicken, 1.9 percent for beef, and 2.4 percent for lamb and mutton. In addition to price spikes, the decline in pork consumption is also in part due to enthusiasm for other meats as income rises.

Conclusion

Although overall volatility in the Chinese pork market in the past decade was in some ways expected, each particular upturn and downturn has come as a surprise. Beginning with the disease-induced shortage in 2007 through the latest shortage in 2016 led by culling, each price spike has rattled the market, and delighted foreign exporters. The government’s interventions through industry transformation and policy reform have not yet been able to bring about greater price stability.

In coming years, pork will likely to continue to be a major part of Chinese consumers’ diets, even as other meat sources slowly increase in popularity, taking a slight edge off pork’s dominance. We should expect for pork consumption to grow in China (albeit more slowly than in decades past), for the simple reason that population and per capita pork consumption continue to grow. In addition, Chinese consumers are already demanding more food safety inspections as they grow wealthier; the government will likely respond in part by encouraging greater standardization in industry practices, a policy that will favor larger producers.

Eventually, as the industry makeup changes by becoming more consolidated among larger players, some of the volatility will decrease. Indeed, this current contraction might prompt all parties to stabilize production and better forecast demand.

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