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From bacon to blockchain - China's changing pork sector

China, the world's largest pork market, is seeking to reform the country's pork industry in a drive to stabilise prices, improve product quality and adjust to changing consumption trends.

At the same time, private companies are also looking to meet higher standards and expectations of more sophisticated consumers.

Pork index

Perhaps the most important event in recent months has been the introduction of a pork price index at the Dalian Commodity Exchange, the first in China.

The China's agriculture ministry and the Dalian Commodity Exchange signed the "Joint Action Plan for Bulk Agricultural Commodity Market Information" to jointly issue a "lean type pork price index".

The pork price index, introduced on March 14, is the country's first pork price index that is published on a government public service website and oriented toward a commercial application.

Stabilising factor

The index is compiled by using data from 89 large sized slaughtering companies in 16 main production and sales provinces in China.

The Dalian exchange said that "these slaughtering enterprises are representative of the country's industry as their production accounts for 32% of the total slaughter volume of the designated slaughtering enterprises above a certain size across the country".

This development is viewed as a stabilising factor in a country with often volatile pork prices.

That's because the Chinese market has so far been dominated by small-scale farms which are highly sensitive to price swings. This has historically made it difficult to create a price index.

In the past, when pork supply was high, farmers reacted to a drop in prices by slaughtering pigs for meat rather than breeding more piglets.

A few months down the line this would result in a shortage of pork, sending prices high again.

Futures contract looms?

The introduction of the pork price index also lays the groundwork for futures and options contracts, which the Dalian has already hinted at.

Introducing a futures contract could result in more price stability because buyers and sellers can hedge against risk by agreeing on a price in advance, which could give pork producers peace of mind.

A futures contract is an agreement to buy a commodity or another asset at a specific price but have it delivered and paid for at a later date.

Crackdown on urban pig rearing

Another major development has been a crackdown on urban pig rearing and a drive towards more centralized, large-scale farming.

China's latest five-year plan for agriculture set a goal of moving swine production away from waterways and densely populated areas, and into the countryside.

This resulted in widespread bans on pig production in urban areas, being implemented by local authorities from 2017.

The main impact from this will be lower pig production in the short term, which could result in higher domestic prices and more imports to compensate for the shortfall.

And as China consolidates and modernises its swine industry, the total volume and market share of pork production from large companies, especially fully-integrated operations, will further increase.

Chinese takeover

Pork has a huge influence on the Chinese economy, which is most pronounced in the consumer price index and is also reflected in inflation data.

According to some estimates, the country is home to half the world's pig population and it also imports vast quantities of the meat.

This dynamic is seen as a primary reason behind the purchase in 2013 by China's WH Group of US-based pork producer Smithfield Foods.

The rationale behind purchasing Smithfield Foods was to take advantage of lower hog prices in the US and higher pork prices in China.

Given China's huge appetite for pork, perhaps it is not surprising that operating profits at Smithfield's fresh pork business increased by 141% to $545m in 2016.

'Growing faster than anywhere else'

In a Bloomberg interview in March, Kenneth Sullivan, executive director of WH Group and chief executive of Smithfield Foods, said that the company doesn't see pork consumption moderating in China - not in the long term at least.

However, "in the short term the macroeconomic environment in China will cause a bit of a slowdown there.

"It's already put a little bit of a dent there in protein consumption in the country.

"But if you look at it over the very long term, protein consumption in China is growing faster than any place in the world.

"The urbanisation, the increasing incomes all these have a very positive correlation to pork consumption and to protein consumption in general," Mr Sullivan said.

Sow shrinkage hangover

Rabobank has underpinned this cautious forecast, with the bank downbeat on Chinese pork output prospects for the first half of 2017, given that "the sow inventory before August 2016 was, on average, 5% lower than 2015.

"Production will likely start to recover in the second half of 2017, as lower feed grain prices encourage farmers to build up herds and newly established capacity comes online."

Mr Sullivan added that "we could see a significant increase in exports from the US to China the big idea is that China is the biggest pork market in the world half the world's pork is consumed in China, so it's a huge market".

Western allure

Mr Sullivan also pointed out in the interview that consumption trends are changing in China.

Consumers are becoming more sophisticated and demand for Western style meats is growing.

He added: "The more income you have you change the way you consume pork.

"As their incomes rise, the more Western style produce they will consume, so American style bacon, ham, sausage, these sorts of things.

"For us, the WH Group, it's a huge opportunity".

Blockchain earns its bacon

Other US firms are also aware of this opportunity and are looking to ride this wave of change.

One of them is Walmart's Chinese arm, which has teamed up with IBM to roll out a blockchain system to track pork movements from farm to store shelves.

The rationale behind this is to show customers that Walmart pork products are of high quality and are traceable, which is hoped will give Walmart customers peace of mind.

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