China’s inflation grew by 6.5 per cent in August, 2007 from last year, which is eleven year high. On first sight inflation figures may seem alarming but a closer look tells a different story. The rise mainly comes from food prices which increased by 18 per cent in August over last year. During the period January to August the food prices have increased by 9.3 percent over the same period last year. Non Food Prices have only increased at around 2 %. Nonetheless, Chinese authorities are very concerned as this hurt the poor. The Government, remembers that the infamous Tiananmen Square event was preceded by soaring food prices.
Why are the food prices soaring? The main reason for this is rise in meat prices, which rose by around 49 per cent in August, 2007 and by 27.3 per cent in the first eight months of this year. The big star is the pork price which is higher by around 77 per cent from last year. China is the world’s largest pork consumer. The rise in pork prices can be attributed to the breakout of the blue ear disease among pigs which resulted in massive killing of pigs. Some estimates say that almost 20 per cent of the pig population has been wiped out. Also, the main feed for pig globally is corn. The current focus on climate change and search for cleaner fuel has led to increased use of ethanol as fuel. Corn demand by ethanol industry has increased tremendously. This has resulted in corn prices increasing by as much as 30 percent in last one year globally. Thus, the cost of raising pigs has also increased. Authorities have taken various steps for increasing pig supplies like free vaccination. A budgetary allocation of 1.5 Billion Yuan has been made to boost pig supplies. Raising pigs takes around two years time. So, the next best solution is obviously- buy .One of the major beneficiaries of this has been the US Meat Producing giant Smithfield Foods which has bagged an order to supply 60 million pound of pork to be delivered by December. Among other measures, it is expected that Chinese authorities might try and move corn supplies away from ethanol industry, which will be difficult as environmentalist’s voice gets stronger. All these efforts have begun to bear fruit (or rather Pigs), pig prices dropped by 11.3 per cent in a single month since August owing to decrease in spread of disease. Chinese authorities have assured that pig prices are unlikely to increase in the long run but short term turbulence is inevitable. Is there a lesson to be learned for India in managing supply side shocks?