The news today that China's government will try to tame inflation by releasing "pork reserves" from freezer facilities and subsidizing live pigs in large farms might reasonably strike you as bizarre. But, as The Wall Street Journal explains, the move actually makes sense. China, after all, is the pig capital of the world. The country is the world's biggest pork consumer, with the average Chinese person eating about half a grown hog each year, and China produces more pigs than the next 43 pork-producing countries combined. Furthermore, volatile pork prices are perhaps the most important contributor to inflationary pressure in China right now because China's favorite meat is, by one estimate, the single largest component of China's Consumer Price Index (or, as some call it, the "China Pig Index"), which measures the change in price of a "basket" of typical household consumer goods. Those pork prices are rising sharply, hitting record levels last month.
The government's now trying to boost supply to meet demand, the Journal notes, but its stockpiles represent a tiny fraction of China's annual pork consumption of 50 million tons and subsidizing pigs may "take four to six months to show results, in line with the amount of time it takes to rear a pig for slaughter." If China can't get inflation under control, it risks undermining economic growth and social stability. What accounts for the disconnect between supply and demand? There are multiple theories:
Rising Incomes: The AP explains that China's households are growing richer, which may translate into rising demand for meat, especially among lower-income Chinese families.
Money Supply: The AP adds that a rush of bank lending following the 2008 global economic crisis means there's more money swishing around the country.
Fewer Pigs: The Journal notes that China's hog population took a beating from a swine flu epidemic in 2009 and foot-and-mouth disease last year. China's small-scale farmers, who account for up to 90 percent of China's pork and are "acutely sensitive to the movements in price that determine their profit or loss" also didn't have much incentive to breed pigs in 2009 because pork prices were low.
Costlier Feed: Yes, the Journal observes, pork prices are now high again, so farmers should be motivated to breed more pigs. But corn prices are also at record highs, which is giving the farmers pause.
Costlier Labor: Rural workers are demanding higher wages as factory wages rise in China, according the the Journal, making it costlier for farmers to raise pigs.
Credit Supply: China's central bank has been tightening the credit supply to keep inflation in check, the Journal explains, but that means China's slaughterhouses don't have much cash to buy pigs from the farmers.
Time: "It's not like we can just instantly raise pigs when prices are high, it takes time," a farmer tells The Financial Times. An economist tells the paper that he expects pork prices to begin falling in the next few months. "Pork profitability for hog farmers has been improving since last July, and given the one-year pig production cycle from mating to maturity, we should see rising production," he explained.