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The intricacies of the market explain pork scarcity in China…oh, and an indictment of central planning

July 8, 2011

Why Pork Prices Are Such a Big Deal in China – China Real Time Report – WSJ.

This is a fantastic piece that more than adequately explains the intricacies and complexities of a national and international market, you know, those things progressives think they can control?  I will start with a most excellent quote:

One Sina Weibo user summed up the public mood: “In a country where our industry and economy are growing quickly, why is it so hard for the everyday man to get his food?”

I bet the Soviet people asked the same thing quite often.  China is quite different from the Soviet Union though, they have a vibrant “free”-market economy that is run by a top-down central planning scheme…hmmm, sorta like the United States.  So unlike the early days of the Chicomms and Mao, farmers actually run a business and are seeking a profit (sshhhh, don’t tell the progressives!).

Pork is the most popular meat in China, therefore demand is always up on this product.  From a production standpoint, the primary dictate for pork prices is the cost of corn.  According to the article, for a Chinese pork farmer to break even, he needs to be able to sell his pigs at a 6:1 ratio to what he pays for corn.  Jump-back to 2009 where the ratio was slightly above the break-even point.

Understand, according to the piece who quotes industry experts, 90% of China’s pork industry is comprised of small farms and backyard producers, no huge Smithfield concerns going on here, it’s all about small, agile producers who quickly adjust to changing market conditions.  This is important to understand – larger producers can buy corn and have it shipped to one location, compare to say 1000 small farmers who need that same amount of corn, but instead it needs to be shipped to 1000 different locations.  To the corn producer, or more accurately, the middle-man who is selling the corn to the Chinese market, it is much easier to ship it to one location.  Therefore, corn costs are less to a large producer than to 1 of the 1000 farmers who needs a much smaller amount, hence a small farmer’s productions costs and ratio is necessarily higher all things being equal.

So we are sitting just above the break-even point for a small farmer in 2009.  There was no incentive for these farmers to breed more pigs, in fact there was a disincentive since having more pigs means the farmer needs to buy more corn to feed pigs that aren’t making him any more money.  Now, you gotta think like a farmer a bit here.  Is it easier to build new pens and keep on eye on your pigs so that they don’t breed, or is it easer to just sell off some sows and not have to worry about them getting pregnant?  Obviously, the second route is easier, and that’s what happened.  Less pigs making babies, means less supply in 2009 and in the future.  Less supply, means higher prices (sshhh, don’t tell progressives!).

Amazingly, a Chinese meat vendor can grasp this simple concept, but our intellectual betters in the ruling class can not:

 As Mr. Liu, a meat vendor from a Beijing supermarket ruminated, it’s all about incentives for farmers: “High prices now makes sense, since last year vendors were losing 400 to 500 yuan per pig due to too many being reared. Personally, although people say it is a high price, I think they need to maintain it. After all, if the price is lowered, no one will want to rear the pigs anymore.” [emphasis added]

Sad how a communist understands the benefits of profit-motive better than most capitalists in America.

The pork to corn ration has increased slightly, 8.5:1, but according to the article, that is not enough to motivate farmers to get the piggies doing the Humpty-dance.

Something else that is keeping pork production down is the decrease in available labor at the small farms.  Workers can expect 15% higher wages in factories, and they are leaving seeking that money.  But even if a farmers laborers are not leaving, there is certainly demand felt by the farmer to increase wages to keep his workers “on the farm”.  Higher wages equal lower profits (sshhh, don’t tell the progressives!).

The last thing contributing to the scarcity of pork in China is the government’s monetary policy…oh come one, you knew the government had a part to play in this.  Like here in America, the Chinese government is trying to stabilize inflation through policy.  As the central bank slips the noose around the credit market, the slaughterhouses have less working capital to purchase pigs from the farmer.

Talk about unintended consequences – as the Chinese government seeks to restrict inflation, they are inadvertently causing an increase in pork prices by reducing the supply of pork.  But, as the price goes up, eventually the farmers will get the big pigs making little pigs and supply will increase.  Not to mention, our government could play a big factor in this, by finally cutting ethanol subsidies which are driving the price of corn up in the world markets (sshhh, don’t tell the progressives!).

After reading that little narrative, do you think you could sit up high and control the interactions necessary to supply your country of a billion people with the food they need everyday?  Not to mention, some things you can’t control, like the higher price of corn due to another country’s subsidizing that market.

Hubris would be an understatement for someone who believes they can centrally plan such things, I think a god-complex would be more accurate.  And that you can tell the progressives!

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