Pork prices threaten higher inflation in China and promise higher farm profits in South America

04/11/2011 7:17 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This little piggy went to market. This little piggy stayed home. This little piggy had roast beef. This little piggy had none.

Well, actually China’s 689 million pigs will have none—unless China imports 68 million tons of soy beans a year by 2014. That would be 17.7 million tons more of soybeans than China imported in 2010. (Just to put this in perspective, the entire soybean crop in Iowa in 2010 came to just 13.5 million tons in 2010.) And would mean that China consumes one ton out of every four produced in the world.

The cause is rising incomes in China. Meat consumption has doubled in China in the last two decades and it takes about 2.8 pounds of feed to produce a single pound of pork. The average person in China will consume a record 86.6 pounds of pork this year, compared with 43.3 pounds in 1990, according to the U.S. Department of Agriculture. Since 1990 China has also added 182 million people.

U.S. farmers won’t be the biggest beneficiaries of rising Chinese soybean imports. Oh, sure, they’ll get the benefit of rising prices that are projected to hit $16.80 a bushel by December. The price has dropped slightly lately on news that Chinese crushers have cut back on orders. (I think this is a temporary response to higher prices.) Soybeans for May delivery sold at $13.72 a bushel on April 11.

But U.S. farmers are actually cutting the acres they plant to soybeans in favor of growing more corn. Soybean prices are basically flat this year while corn prices are up 25%. That’s led U.S. farmers to plant the fewest acres to soybeans in three years.

The extra soybean supply will come from South America. Brazil, the No. 2 soybean exporter in the world, is projected to harvest 70.5 million metric tons of soybeans in 2011, up from 68.6 million tons in 2010—if wet weather hasn’t damaged the crop too badly. No. 3 Argentina is projected to harvest 49 million metric tons this year, down 10% from 2010 on spotty drought, according to the U.S. Department of Agriculture.

The rise in farm incomes from higher soybean prices works to the benefit of farm equipment makers such as Deere (DE) and CNH Global (CNH). The increase in global soybean trade will raise revenue at Bunge (BG), the leading oil seed processor in the world.

Any rise in the price of soybeans and thus in the price of pork will make the Chinese government’s battle against inflation just that much harder. Food inflation hit an annual 11% in February. Wholesale pork prices are up 40% since May 2010

 

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