China and the Great Pig Panic

http://www.newsweek.com/id/107548/output/print

The article describes the rapidly increasing price of pork in China. I will further explain this situation by using demand and supply concepts.

Supply:
One of the main reasons why the price of pork in China keeps rising is that there is a shortage of pork supply. When supply falls, the supply curve will shift to the left, driving the price up. The factors affecting the fall in supply is as follows:

Firstly, the inflation rate is extremely high in China today. Inflation drives the price of almost everything up including feed-grains for hog farming. The increase in the cost of production will result in a fall in supply. Even though “the Chinese government has doubled subsidies to pig farmers to encourage them to raise more hogs”, this is not enough to compensate the increase in cost of production, thus not effective in convincing the farmers that hog farming would be lucrative.

Secondly, climatic conditions and unexpected diseases contribute to the decrease in supply. “The outbreak of deadly blue-ear disease last year hit Chinese hog farms, infecting hundreds of thousands of animals and necessitating an enormous cull”. Moreover, “Attempts to increase supply are being hindered by recent winter storms, which have snarled traffic and prevented shipments from reaching their markets.”

“Discouraged by their losses and by rising feed-grain prices, many farmers soon gave up on raising hogs. Pork supplies dropped by a tenth, driving prices up about 55 percent, to more than $4 a kilo today.”

Demand:
The Chinese’ demand for pork is growing extremely fast and thus lead to a rightward shift of the demand curve, raising the price of pork.

As vividly explained by the author, “To understand why, start by considering just how hooked on the meat the Chinese really are. Their addiction parallels Americans' oil habit”. Yes, truly, pork has been a mainstay of the Chinese diet for millennia.

Pork is certainly a daily necessary for many of the Chinese. It has also been their habit or even addiction to eat pork. Hence, the demand for pork is extremely price inelastic. Increasing the price will result in a less than proportionate change in quantity demanded.

In addition, there are few substitutes for pork. Though there are many other kinds of meat, the Chinese’ special penchant for pork cannot be replaced by any other types of meat. To them, pork just tastes very different from others. This makes the demand price inelastic as well.

Price control:
On Jan. 16 this year, Beijing imposed short-term price controls for large-scale producers of staples including pork to alleviate the detrimental effect brought by inflation. Despite the effectiveness of this measure, as we have learnt from the chapter of price control, price control (price ceiling in this case) generates problems. As the price is set below the market equilibrium price, there will be a shortage of pork. The goods will be sold base on first-come-first-serve basis. Therefore, many people cannot get what they want for their daily necessities. Black market may arise as well.

Xu Hao