source from:WSJ
MARKETS  COMMODITIES
Pork Shortage in China Leads to Soaring Local Prices and Increase in Imports
U.S. pig industry benefits from boost in exports to pork-loving China


By LUCY CRAYMER
Updated April 11, 2016 6:21 a.m. ET
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Too few pigs are headed to markets in pork-loving China, leading to soaring domestic prices and a rush of pork imports from the U.S. and elsewhere to fill the gap.

Prices of the key ingredient in everything from lunchtime pork dumplings to fiery Sichuan-style mapo tofu have risen 48% in China in the last year. The average price of pork was 25.67 yuan a kilogram (roughly $1.80 a pound) compared to 17.35 yuan a kilogram a year ago.

High pork prices were felt in the latest inflation data out of China Monday, which was up 2.3% in March from a year earlier.

Pork continues to hold a high weighting–around 3%, according to Rabobank–in the price of a basket of goods and services that is used to calculate the consumer price index.

Prices of pork in China, the world’s largest pork consumer, are higher than elsewhere in the world. For example, pork in Europe sells on average for $0.65 a pound—about half the cost in China.

China’s pork imports in February were up 76% on year, and up 56% in January on year.

Imports are forecast to remain robust until the second half of the year, analysts said.

The U.S. has benefited. Its exports to China in February were up 38% on month, to 15,925 metric tons, according to the U.S. Department of Agriculture. That was highest monthly level since March 2014.

However, the difference wasn’t totally due to the recent pork shortage in China: More U.S. pork has been available for exporting to China since Beijing lifted restrictions last October for 14 U.S. pork-processing plants and warehouses. Chinese regulators implemented the ban in 2014 after saying they found traces of the muscle-enhancing drug ractopamine in U.S. pork.

Because China is such a large pork buyer, even a couple of percent increase in its purchase of U.S. pork has a considerable impact on how much pork is available for U.S. consumers, said Len Steiner, principal at Steiner Consulting Group. His group expects to see U.S. pork exports to China to increase by around 55% in 2016 over 2015.

Meanwhile, futures in the $8 billion lean-hog market on the Chicago Mercantile Exchange have surged 12% since the start of the year.

Pork exports by volume to China from Europe—the world’s largest pork exporter—shot up 78% in January on the prior year to 116,574 metric tons. This comes at a helpful time for Europe: Prices are 10.1% lower on year, as it continues to struggle with oversupply after losing Russian as a market in 2014 due to sanctions.

Historically, pork prices have been volatile in China. The sharp rise in prices over the last 12 months caught the pork market by surprise.

Better information has allowed farmers and corporate farms to respond to supply demands quicker, said HSBC economist Julia Wang, but “this time around, people got too pessimistic on pork prices and the de-stocking was material.”

Lower profits before the price run-up prompted many farmers to give up on pigs. That depleted stocks. Prices need to be six times the price of grain in order for farmers to break even. Now the multiple is at a profitable 9.13 times, Chinese official data shows.

Other farmers were forced out by tougher environmental rules. And an outbreak of disease earlier this year wiped out many of China’s piglets.

“There has been a continuous decline in hog and sow numbers, and in February it was still declining,” said Chenjun Pan, a senior industry analyst at Rabobank.

But Ye Zhenqin, a senior official of the Ministry of Agriculture, said at a news briefing last Thursday that prices will stabilize as supply increases.

Helpfully, piglet survival rates will improve as the weather warms up. Furthermore, a number of large companies have expansion plans. This is expected to stabilize prices over the coming months and might even push prices lower as the end of 2016 nears.

“We expect prices to decline by around 15% toward the end of year because piglets that are born in the summer months have a higher chance of survival, which means by the third or fourth quarter of this year, prices will fall due to ample supply,” said Feng Yong-hui, chief analyst at swine industry research company Soozhu.

—Jenny W. Hsu and Mark Magnier contributed to this article.