Event
In July 2022, the country experienced consistent high temperatures, but there was plenty of rainfall.
Thoughts
Agricultural and Livestock Product Prices
Agricultural products: Items like wheat and cotton have indeed seen a decrease in supply due to high temperatures, leading to price hikes.
It's the combination of high temperatures and drought that's fatal for agricultural products.
The livestock industry faces the same issues. When it gets too hot, hens lay fewer eggs, and pigs breed less. So, in theory, their prices should rise.
However, the interesting part is about the government's think tank. They're truly forward-thinking experts in their respective industries. A few months back, they asserted that pork prices must remain stable, prohibiting businesses from "unjustly raising prices" (officially to prevent situations like OPEC's control over oil, but essentially asking businesses to take a hit on their profit margins in favor of public welfare, promising potential future gains). Then, around July 4th and 5th, the National Development and Reform Commission advised against erratic pricing in the swine market amid the hot weather, expressed intentions to initiate national pork reserves, and joined forces with the Dalian Futures Exchange to monitor pork futures prices. This move essentially hinders pork businesses from hedging risks through futures, perhaps a demonstration of national control. Despite its clear advantages, one other aspect I've been pondering on is how it effectively prevents external capital, like Goldman Sachs, from infiltrating and causing disruptions (think about events like the Greek debt crisis, the Argentine crisis, Goldman Sachs’ role in various financial controversies). Since foreign capital finds it hard to penetrate the domestic market and given the strict regulations, this strategy can effectively safeguard domestic stability and future prospects.
Speaking of the state using the exchange to massively forcefully lower prices, the last time was for thermal coal. At the end of 2021, those speculators who defied the state to manipulate coal prices, well, their outcome was quite something. So, the price of live pigs is bound to decline or at least not increase. This is contrary to what I wrote in another article today. In that article, I mainly analyzed from the perspective of the 400 million pigs mentioned in the economic report. In the past, it was more than half a pig per person per year. This year, half a pig is the maximum, so the supply should be reduced, and the price should rise. But in reality, this supply hasn't decreased by much. Coupled with controls, it's entirely possible for the price to continue to fall, so the price can indeed hit a new low.
Thermal Coal and Non-ferrous Metals
High temperatures -> Increased power consumption -> More coal burning -> Price rise
But just like pork, the state strictly regulates this.
Also, there's an increase in demand for appliances like air conditioners (firstly due to the heat, and secondly because of consumer vouchers, even if they aren't that effective). However, the growth won't be significant, just a modest year-on-year increase.
Poultry Farming
High temperatures aren't ideal for poultry. This impacts the demand for feed like soybean meal, rapeseed meal, and corn, which is a bearish sign.
Construction
Construction activities are hindered, and there's a halt in real estate projects (excluding the real issue that the real estate industry is running out of money). This leads to decreased demand for construction materials like steel, cement, glass, and raw materials for steel, such as coking coal.
While high temperatures aren't the primary reason for the decline in futures prices of these commodities this month, they surely add to the momentum.
Thoughts on CPI Weights
China's CPI is dynamic, designed to enhance economic data presentation and boost confidence. Despite extensive searching, I couldn't find exact proportions, but it's generally believed that a third comes from food, with pork being the most significant, roughly accounting for 10%.
On a side note, the US CPI is somewhat amusing. Its CPI directly excluded commodities (like oil and natural gas) (tho we know the price change in commodity will be reflected in the end product price, but I think this still underestimate the real rate), the CPI growth should be around 15-20%, in line with the actual situation of a 20% or higher price increase on end product.
Forecast
- Pork prices will hit new lows within the next two months (by September) as a potential strategy to attract foreign investments in non-monetary sectors.