China and the Great Pig Panic

But the price of pork may have slipped beyond even the Chinese government's control. Price caps are being undermined by independent-minded small farmers and lax enforcement. Attempts to increase supply are being hindered by recent winter storms, which have snarled traffic and prevented shipments from reaching their markets. And in the long term, demand for pork and inputs for raising pigs (such as corn) are growing so fast, some experts fear China may not be able to supply itself much longer.

Over the past 20 years, as China has boomed, meat consumption has doubled. Meat still accounts for only six percent of rural food consumption, but the figure is now triple that in the fast-growing and wealthier urban population. And 65 percent of the meat Chinese eat is pork. Jing Ulrich, JPMorgan's chairman of Chinese Equities, says most countries experience an even more dramatic shift toward a meat diet when per capita income reaches $3,000. China's is currently $2,616—meaning that a big acceleration in demand is coming.

Then there's the grain problem, the consequences of which could be even more far-reaching. Even if more and more Chinese turned to raising pork, local pigs would still get more expensive, because the inputs—the raw ingredients required to raise an animal—are becoming costly. This could have effects far beyond China, by driving up the price of those inputs—especially feed grain—worldwide. For China's grain self-sufficiency is eroding. It has only 7 percent of the world's arable land (to feed 22 percent of the global population), and even that figure is shrinking. Much of the remaining farmland has been ravaged by pollution and water shortages. And over the past 15 years, many farmers have switched from growing grain to cash crops—or have abandoned farming to become migrant workers.

There are other strains. Like many countries, China had been pushing aggressively to produce ethanol from corn, and by 2006, ethanol was gobbling up more than a tenth of China's corn output. That prompted the government last July to bar ethanol production from feed grains.

Still, supply pressures are mounting. It's a safe bet that China will soon become a net corn importer, predicts one industry source, who asked to remain anonymous because such predictions could rattle world markets. Ulrich agrees that the shift is "upon us" in 2008 and compares this turning point to 1993, when China went from exporting oil to being a net importer of crude for the first time in its history.

Today, of course, China is the second biggest petroleum consumer in the world. We all know what kind of impact the growing race for oil has had on geopolitics. If China's appetite for pork has the same effect on global feed-grain supplies, watch out: China's hunger for more meat could soon start affecting everyone's pocketbooks.

© 2008