Pork price may rise and drive up CPI(2)

Given that the price of soybean is likely to remain high, the extra cost will be directly transferred to Chinese livestock production.

Chow said that feed costs account for 60 to 70 percent of farmers' production cost in China.

Although pork accounts for just 3 percent of the products used to measure CPI, wild fluctuations in pork prices can change CPI significantly, sometimes earning CPI the nickname "the China Pork Index".

Chow added: "China could experience significant food price inflation in the first quarter of 2013 for two main reasons: an increase in the price of soy will impact feed prices; and ultimately that will be transferred to pig prices.

"If the feed price rises too fast, small to medium-sized farms will not replenish their herds, as a result of lower profit expectations, or even losses, and so there could even be shortages of pork at this point," Chow said.

"I would not be at all surprised to see negative food CPI in the next two months. Pork and vegetable prices have continued to fall, driving the food CPI below zero. For the second half of 2012 we forecast a food CPI of circa negative 3 percent to 1 percent."

In the first half of 2013, the food CPI will start an upward trend, possibly even reaching more than 10 percent in the third quarter of 2013, at the top end of expectations, Chow said.

The People's Bank of China said on Aug 2 - within its latest monetary report for the second quarter - that it expected China's CPI to pick up after August compared with last year, and that current prices remain relatively sensitive to rises in domestic demand.

It added that government policies to boost the economy would be more likely to act as a significant stimulus on inflation rather than on overall economic growth.

The National Development and Reform Commission announced last week that it had launched a second round of domestic frozen pork purchases to prevent any further drops in the price of pork.

The commission had rolled out a first round in May, but did not specify the exact amounts and timing.

"Judging by the current state of the domestic pig farming industry, the low pig prices will keep going for a certain period because of the high productivity of pig farmers, who are being advised to weed out aged and low-production sows to reduce losses," it said in a website announcement.

Feng Yonghui from Soozhu.com added: "The government's purchase was mainly to stop further price falls and to protect the interest of farmers. But the amount of purchase will not be big enough to affect the domestic price of pork."

The rapid increase in pork imports, which doubled in the first half of this year compared with last year, have severely dampened the domestic pork market, he said.

"Imports of pork offal account for about 70 percent of China's pork imports, but the import price is 70 percent lower than the domestic pork offal price."