If pigs could fly, we might avoid the price issue

Bulls and bears have dominated market conversations in the past few months, but now is the time to talk about the humble pig. It is squealing loudly for attention.

Nowhere else in the world have rising pork prices created such a buzz among policymakers and consumers than in China. Of course, that is hardly surprising as pork is one of the key food staples here. It is also a major driver of the country's Consumer Price Index, jokingly referred to as the Consumer Pig Index.

Attempts have even been made to plot growth trends linking pork price fluctuations with a host of key macroeconomic indicators, including GDP and money supply. That illustrates how important it is in Chinese society.

Basically, pork prices have been rising for more than a year. On Aug 4, the Ministry of Commerce reported that prices were 16.7 percent more than 12 months ago. This was the main factor behind July's rise in the CPI to 1.6 percent, up 0.2 percentage points from June, despite sluggish growth in the cost of nonfood items.

Pork is so popular that it accounts for an estimated 3 percent of the basket of goods and services used to calculate China's CPI. Rising prices, therefore, have left consumers perplexed.

Many will wonder if this is a natural result of market forces or a sustained trend?

In fact, we are simply going through a normal "pig cycle", a two-or three-year period of fluctuating prices. Only this time, there are marked differences, which should be discussed.

The pig farming industry as a whole is undergoing a transformation. Smaller, backyard businesses are being replaced by commercial-scale operations. At the same time, stringent new environmental laws and regulations have been brought in.

This has seen a large number of small pig farmers go to the wall, which is unfortunate but unavoidable, as the industry goes through "growing pains". Again, this is all part of the fundamental changes that are taking place within the rural socio-economic landscape.

Traditionally, backyard pig farming was a crucial part of village life before people started flocking to the cities for better-paid jobs. This has triggered a labor shortage in the sector and many small pig farming operations have simply disappeared.

Instead, larger, more modern operations have sprung up. This in turn has presented enormous opportunities for commercial pig farmers to adopt a value-added approach.

Eventually, this will involve integrating the whole business from feed supply, to pig breeding and rearing; from slaughtering to processing and marketing. By doing this, it will improve efficiency and profitability, making the pig industry much more resilient to cyclical price gyrations.

Another important dimension to the current cycle is the enforcement of stringent environment laws and regulations, which ban pig farming close to waterways and in ecologically sensitive areas. Businesses not up to the higher waste treatment standards have also been closed down.

All this has contributed to the supply shortage during the current "pig cycle", and forced up prices for consumers. Even so, it has increased food safety by promoting sustainable development within the industry.

Looking at the broader picture, the rise in pork prices is likely to slow as big operators respond to market demand. Imports can help fill the gap and it is worth recalling that one of the largest overseas corporate acquisition by a Chinese company was Smithfield, the biggest pork provider in the United States.

The transformation of the industry in China may not get rid of "pig cycles", but it should end excessive volatility in the market. Pigs might not fly, but we will soon see more of them in much larger pens.

The author is a senior economist with the Food and Agriculture Organization of the United Nations.