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High Prices Lure International Investors to Chinese Pork Breeding Industry

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Inflation in China soared to its highest level in three years the week of July 15, driven primarily by pork prices which rose 57% year-over-year, to a record 26.15 yuan, or $4 per kilogram.

According to a report in today's Des Moines Register, China is buying American hogs in an attempt to settle the market, leading to an 18% jump in US pork exports so far this year. But, the Chinese are also taking steps to tamp down pork inflation by raising more pigs. And, as Vivian Li of Dezan Shira & Associates' China Briefing notes, "Various companies -- not only traditional players in the field of pig breeding and meat processing, but also investment banks, real estate developers and even information technology companies -- have rushed to China’s swine industry for a piece of the profit."

Li continues:

Global investors have been eyeing China’s pig farming market since the last round of pork price fluctuations back in 2007, when prices went up significantly due to a supply shortage after the Porcine Reproductive and Respiratory Syndrome outbreak.

[...]

Private equity arms of foreign investment banks started their large-scale investments into Chinese pig farms back in 2007. Towards the middle of that year, Deutsche Bank Group’s DWS Investments established the DWS Global Agribusiness Fund with investment in China’s breeding businesses. Not long after that, in 2008, Goldman Sachs also announced investments of US$200 million to US$300 million in acquiring a dozen pig farms in China’s Hunan Province and Fujian Province. The U.S.-based investment bank is also among the investors in two of China’s largest meat processing companies, Shuanghui and Yurun Group, and obtained distribution and marketing support from them for its invested pig farms.

Investor interest in pig farms has been further upgraded this year as a result of the significant pork price increases. In June, Japan’s Mitsubishi Corp. – along with its subsidiary meat processing companies Itoham Foods Inc. and Yonekyu Corp – teamed up with one of China’s largest food manufacturers COFCO for an RMB10 billion-pig breeding joint venture (JV). The three Japanese companies have agreed to subscribe for a 33 percent share in the new JV. The cooperation marks a serious step by Mitsubishi into China’s meat market, expanding the company’s fame from heavy industry to the dining table of the Chinese consumer.

In addition to the Japan’s Mitsubishi, the Thailand-based Charoen Pokphand Group has kicked off the construction of a pig farm with a production capacity of 500,000 hogs every year in Shandong Province, according to Reuters. The company is also building a farm that can produce 1 million pigs every year in Guangdong Province and another one with similar production capacity in Henan Province.

Li also points out that Chinese internet company NetEase.com "announced plans to launch a 80-hectare pig farm in Zhejiang Province" earlier this year, and Chinese computer maker Lenovo has invested $30 million into a Jiangsu breeding operation.

In China, where about half a grown hog is eaten per person, per year, the government recently began a food safety crackdown, investigating six million food companies, arresting 2,000 people and shuttering 5,000 businesses for "illegal practices."

The Irish Times says the enforcement campaign was instituted in April, "following a spate of tainted food scandals - included pork found on the market so loaded with bacteria that it reportedly glowed in the dark."



It was an incident that Laurie Burkitt of the Wall Street Journal described as "perhaps the most bizarre case" out of the "spate of food contamination cases... that have shock[ed] even the most jaded of observers here" -- including one in which 17 Guangdong noodle makers were caught mixing ink and wax into their dough.

The pork, which authorities insisted was safe to eat if fully cooked, was apparently glowing due to "a phosphorescent bacteria." However, as Barbara Demick of the Los Angeles Times (and author of the spectacular book "Nothing to Envy") reported in June, not everyone who comes across tainted Chinese pork is so fortunate.

Wrote Demick:

It was a wedding the guests would never forget. Everybody of consequence in the village had been invited to a banquet to celebrate the marriage of the son of one of the wealthiest families. Fifty tables groaned under a lavish spread of dumplings, steamed chickens, pork ribs, meatballs, stir fries, all of it exceptionally delicious, guests would later recall.

But about an hour into the meal, something seemed to be wrong. A pregnant woman collapsed. Old men clutched their chests. Children vomited.

Out of about 500 people at the April 23 banquet in Wufeng, 286 went to the hospital. Doctors at the No. 3 Xiangya Hospital in nearby Changsha, capital of Hunan province, blamed pork contaminated with clenbuterol, a steroid that makes pigs grow faster and leaner. Consumed by humans in excess quantity, it can cause heart palpitations, nausea, convulsions, dizziness and vomiting.

"It was as though he was poisoned," said a villager named Dai, whose husband was hospitalized for five days.

Once authorities managed to put a (relative) stop to the use of clenbuterol, they witnessed an increase, naturally, in the use of other, similar drugs:



Of course, there are plenty of other ways to skirt food safety regulations for those so inclined -- like soaking meat from sick pigs ($10 a head) in a chemical bath to mask the stench, then selling the parts as fresh (which can net $300), as we saw in 2009:



In describing the situation, the newscaster delivering the story helpfully explained, "The peddlers of diseased pork may have been motivated by high profits."
POSITION:  No positions in stocks mentioned.

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