How big is pork's impact on the August CPI?

Data released by the National Bureau of Statistics show that the July CPI had already fallen for a third consecutive month, and some analysts believe the main reason was a marked decline in the pace of pork price increases.

In fact, this is not the first time "Brother Pig" has run out to disrupt people's judgment of inflation. Since 2004, debates have continued over whether the CPI rise was caused by the "pig cycle" (or, in other words, a structural rise in prices) or by inflation. However, judging from historical data, the fit between pork prices and the CPI (Consumer Price Index) trend is still very high, with the correlation coefficient between the two reaching 0.88 from 2005 to the present. When pig prices rise by more than 30%, they usually drive CPI growth of more than 1 percentage point.

The August CPI will be released next Friday. So what will this figure look like? Before the data is released, we might as well first look at a set of pork-related figures.

The latest data released by the General Administration of Customs show that China's pork imports in July were 183,400 tons, down nearly 10,000 tons from 194,000 tons in June, the first month-on-month decline, but compared with 59,000 tons in July last year, the year-on-year increase was still as high as 210%.

Other data show that in July the national total hog inventory fell 0.1% month-on-month and 2.4% year-on-year, the first decline after the total hog inventory began a slow recovery in March this year and rose for four months.

So, since June domestic pig prices have fallen from highs, and in July the national total hog inventory fell instead of rising. Why? The Animal Husbandry Department of the Ministry of Agriculture discussed the reasons why farmers were not actively restocking at a symposium on hog production on August 24, and believed that environmental protection costs and restricted- and banned-raising policies had a certain impact on hog restocking. In addition, after going through several "pig cycles," farmers have become more rational and will no longer restock in a rush, and many even think prices may not continue to rise next year, so they are more cautious about restocking.

So what have pork prices been like since August? A latest research report released by the Bank of Communications Financial Research Center pointed out that after entering August, pork prices fell month-on-month, the pig-to-grain price ratio fell to fluctuate around 9.2, the average price of piglets and the ex-farm price of hogs dropped to 47.1 yuan/kg and 18.6 yuan/kg, and since July both hog inventory and the number of breeding sows have declined somewhat. Pork prices have entered a downward phase, with year-on-year increases gradually narrowing.

Haitong Securities believes that, judging from the situation in past years, the supply-demand relationship tends to tighten from August to October, pig prices will show a seasonal month-on-month rebound, and combined with the lagging impact of floods and high temperatures, pig prices may still rise in the short term. But from a major-cycle perspective, pig prices are already at a high level, and even if there is a short-term rebound, the strength is expected to be very limited.

However, some people with different views believe that the next four months are in the autumn and winter seasons, and pork consumption is expected to increase compared with July and August. In July, the hog inventory was 375.96 million head, still at a historical low. Without weather, disease, and other factors accelerating farmers' slaughtering, in the short term pig prices are expected to continue fluctuating upward at high levels over the next four months.

In fact, in recent years the hog market has undergone earth-shaking changes on both the supply side and the demand side. We can see that on the supply side, a large-scale "pig-farming war" to compete for the high added value of modern agriculture started several years ago. Not to mention many celebrities entering the hog industry, even some international capital directly or indirectly sneaked into the hog breeding industry, and the major reshuffling of the pig-farming industry has basically been completed; on the demand side, ordinary people's meat consumption structure has become more diversified, and the share of pork in meat consumption has fallen again and again. However, what has not changed is pork's weight in the CPI.

So will "Brother Pig" still "nudge" the August CPI? Huang Wentao, chief macro analyst at CITIC Securities, believes that in the first half of August pork prices fell by nearly 10% year-on-year, and the year-on-year decline in fresh vegetable prices also widened compared with July, so the year-on-year growth rate of the August CPI is expected to continue to fall.