• Local government urged to provide subsidies and forage
  • Beef is a pricey option for China’s cash-strapped diners

The Chinese beef market is facing a conundrum.

The government has pushed farmers to raise production at home and opened the door to more imports, but a slowing economy has left meat piling up in freezers and dragged local prices to a five-year low.

Wholesale prices have dropped 18% from last year’s peak to around 62 yuan ($8.53) a kilogram. Much of the cattle industry is now loss-making and could increasingly become a drain on the public purse after the farm ministry urged local authorities to provide subsidies and forage to farmers.

Food security is a hot topic for the government, which has sought to promote self-reliance across key markets including beef. The deflationary pressures now gripping the economy have forced Beijing to step in and support a variety of sectors from livestock to grains. Now the challenge is to keep farmers solvent, stabilize production and ride out a period of losses, a task made trickier for the beef industry because of a flood of meat from overseas.

China’s beef imports advanced 23% in the first five months of the year as Beijing went on a spree of granting more market access to other countries — call it food diplomacy — to warm up relations with nations including Brazil and Spain. Australia has recently been added to the list.

Beef is a relatively luxurious option in China that costs almost three times as much as pork, the usual meat of choice. As the nation grew wealthier, that allowed for steady gains in both output and consumption. China produced about 7.5 million tons last year, according to the US Department of Agriculture. Demand was just over 11 million tons, with the balance made up by imports.

The USDA is currently forecasting a 2.3% rise in production this year, against demand growth of just 0.4%, although the gap could turn out to be wider given the industry’s worsening conditions.

Additional beef could become available if lower prices force farmers to cut their losses and slaughter more of their herds. Culls in the dairy sector, which is also doing badly, are exacerbating the glut, said Yang Chun, chief beef and mutton analyst at the farm ministry’s markets department.

And demand is slowing as households are compelled to ration their spending. Yang said some sellers of fresh beef to supermarkets and wet markets have reported a significant drop in orders since August. Traders, who asked not to be named discussing market conditions, said frozen stockpiles of the meat remain elevated.

The industry is looking to entice new customers, but there are few corners of the economy immune to penny-pinching while China’s property crisis persists. That suggests any turnaround could depend on the government’s ability to engineer a broad-based improvement in consumer optimism.

“Regular folk don’t have as much money in their pockets as before,” said Yang. The need for cheaper protein means “giving up on premium products like beef,” she said.

On the Wire

Argentina is preparing corn shipments to China that will be the first in 15 years, the latest move by the two countries to expand agricultural trade.

A sustainable rebound has repeatedly eluded Chinese equities in recent years, but optimists aren’t ready to throw in the towel yet.

Chinese Premier Li Qiang stressed an all-out effort in flood relief and urged all regions and relevant government departments to strengthen disaster forecasting and emergency responses, according to China National Radio.

Indonesia is preparing to impose tariffs and use other means to protect its textile industry from imports from China, the latest in a series of nations which are responding to the flood of goods out of the world’s largest manufacturing nation.

This Week’s Diary

(All times Beijing unless noted.)

Wednesday, July 3:

  • Caixin’s China services & composite PMI for June, 09:45
  • CNIA forum in Shanghai on expanding aluminum’s applications, 13:30
  • CCTD’s weekly online briefing on Chinese coal, 15:00

Thursday, July 4:

  • Nothing major scheduled

Friday, July 5:

  • China weekly iron ore port stockpiles
  • Shanghai exchange weekly commodities inventory, ~15:30

Saturday, July 6:

  • Nothing major scheduled

Sunday, July 7:

  • China’s foreign reserves for June, including gold

Written by:  @Bloomberg