Food prices are soaring in China. Stockpiling has now shifted from surgical masks to all kinds of groceries. Even without the hoarding, food supply has suffered from disruptions because of the deadly coronavirus. Food prices rose by more than a fifth in January. Overall inflation is at 5.4 per cent, the fastest pace in eight years. Selected food groups may offer some relief.
Pork prices provide an unofficial measure of future inflation in China, the world’s largest consumer of the meat. Before coronavirus, African swine fever had already squeezed supply. In January, prices rose 116 per cent to just shy of a record high. A combination of prolonged business closures, lockdowns and factory suspensions only tightens the supply chain. Pork prices should stay on an upward trend.
All this has been bad news for restaurants, already hit by a sharp drop-off of visitors, staying at home either by choice or enforced lockdowns. Share prices of local KFC operator Yum China and hot-pot restaurant chain Haidilao are down about 15 per cent since mid-January. Shares in the latter’s rival, Xiabuxiabu, are down more than 30 per cent. Operating profit margins, already falling for the two local chains since 2017, could slide further.
For others, a pig shortage is bullish. Shares of Chinese pork producers such as Muyuan Foodstuff and Jiangxi Zhengbang have jumped as much as 160 per cent in the past year and trade near historical highs. Even so, there is more room to run as earnings estimates soar. The latter’s enterprise value is below 4 times forward ebitda, a steep discount to global peers. Pork prices have risen fast enough to offset the steep costs farmers have incurred dealing with the swine flu.
The case for staying invested in pig producers remains strong. Food stocks, usually a defensive choice, have become useful inflation hedges. Amid an uncertain outlook in China, investors wary of risk have few other options left.
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