Already grappling with sluggish economic growth as a result of the protracted U.S. trade war, China’s leaders are now faced with a problem impacting the pocketbooks of many of the country’s consumers – the surging price of pork. A doubling of pork prices last month sent Chinese consumer inflation to 3.8% in October from a year earlier, its highest level in almost eight years. Soaring pork prices, due in part to an outbreak of the deadly African swine fever, have also driven up demand for pork alternatives including eggs and other meat products. Despite this spike in CPI, prices of nonfood items and factory-gate prices showed signs of weakness, with nonfood price inflation coming in at just 0.9% and the producer price index (PPI) dropping at an annual rate of 1.6% in October.
So, does this surge in pork prices paint a picture of future overall price increases? Not necessarily. The categories of food and energy are significant components of overall price indexes, but their prices tend to be more volatile than those of other components. Environmental factors that can ravage crops or fluctuations in oil supply may temporarily disturb supplies and impact prices, but these may not be related to a trend change in an economy’s overall price level.
In fact, on the heels of the manufacturing sector slowdown and ongoing tariff war, China recently cut the interest rate on its one-year medium lending facility loans for the first time since 2016. The cut was relatively modest though, and many analysts believe more intervention is needed to support the country’s slowing economy. Julian Evans-Pritchard, a senior China economist of Capital Economics, believes this stimulus move could mark the beginning of a series of rate cuts in China.
Aside from making for interesting headlines, does this “pork crisis” have any implications for global markets? We haven’t seen much of an impact on the U.S. market yet, but it is often difficult to evaluate how one individual event can ultimately ripple through global markets. Consumers worldwide are already seeing a large spike in bacon prices.
And while China currently maintains retaliatory tariffs against U.S. pork shipments, a lift of these duties could be a boon for American farmers, whereas purchasers of pork, such as burrito-chain Chipotle, could feel the pinch. While we are always mindful of how economic conditions and current events impact companies, we continue to focus the bulk of our research on fundamental research and independent company analysis to identify securities which we believe are trading at significant discounts to fair value. A continued increase in pork prices and a slowdown in Chinese consumer spending could very well have an indirect impact on some of the companies we own, but by maintaining a long-term focus and remaining price sensitive, we feel confident about how our portfolios are positioned regardless of where pork prices head.