Supply and Price — a case of Hong Kong Pork Market
[Video: https://youtu.be/rErWxsv2k0M]
An outbreak of swine flu in China in 2018–2019, 13,355 pigs died of the disease, and 1,204,281 pigs were culled (You et al., 2021). It led to a sudden decrease in live pigs supply and resulted in a substantial increase in retail pork prices in Hong Kong. According to the Hong Kong Census and Statistics Department data, pork prices were increased by 52.5% and 27.8% in 2019 and 2020 respectively.
More Supply — Lower Price
Rising market prices have attracted farmers to invest more capitals in the pig industry. After a year, a large number of live pigs have been supplied to the market causing wholesale prices to plummet. Last year (2021), the average supply of live pigs to Hong Kong increased from 2,119 per day in January to December 2,927 heads, an increase of about 38.1%! The average auction price dropped from $3,552 in January to $1,613 in December, a decrease of 54.6%! (Figure 1, Food and Environmental Hygiene Department, 2022)
Figure 1 shows that Hong Kong’s pork price and supply have a strong negative correlation. Their correlation coefficient is -89.4%! Also, the relationship reflects that the auction price is very sensitive to changes in supply. Every 1% increase in live pig supply can lead to a price drop of -1.9%, the best fit line have a high explanatory power of 79.8%. Figure 2 shows the scatterplot of the relationship and the best fit line.
Assumptions
It is true that the above analysis does not consider demand factors, but on the one hand, demand data is not available and on the other hand, it is plausible to assume that consumers’ daily demand for live pigs would not change much within a year. It is assumed that the price is not caused by changes in demand.
In addition, it is also assumed that the quality of the live pig supplied is fixed and the total supply quantity is not affected by the supply of other pork or live pigs, including local live pigs. In fact, the number of live pigs supplied from Mainland China to Hong Kong accounted for more than 80% of the total live pig supply in Hong Kong in 2021. The average daily supply of local live pigs in the past year was only about 303 pigs per day, which was relatively stable.
A monopolized supply obeys the law of supply
Live pigs are not frozen meat. They cannot be stored for a long time. Unlike assets that can have capital gains and have interests or rents, the supplier usually prefers selling at the auction price rather than taking back. It explains why live pigs auction market shows a clear negative correlation between supply quantities and market prices.
However, it must be noted that the supply of live pigs in Hong Kong is largely monopolized by a supplier, it explains why the daily supply quantities changed within a narrow range (2000–3000 heads per day). Interestingly, even in a monopolized market, the effect of supply on market prices is strong and negative. In contrast, if you claim that house price rises are also due to insufficient supply of housing units, then a similar negative correlation between housing supply and housing prices in the market should be observed. However, a positive relationship is more often found in housing markets. The claim is not empirically supported.
A Shock Causes a Series of Price Fluctuation Cycles
Finally, from the case of the swine flu disruptions on the supply chain of live pigs, it shed light on the cause of the recent high inflation in the world. The swine flu case indicates that it can take years to stabilize the market price fluctuations caused by an external shock. It is because, among others, suppliers rely on current market price information to decide their future plans of production, but if it takes a long time to produce, then the lagging supply does not only fail to respond to the market changes in a timely manner, but it could also result in a series of price fluctuation cycles.
References
You, S., Liu, T., Zhang, M., Zhao, X., Dong, Y., Wu, B., Wang, Y., Li, J., Wei, X. & Shi, B. (2021) African swine fever outbreaks in China led to gross domestic product and economic losses, Nature Food, 2, 802–808.
Food and Environmental Hygiene Department (2022)Monthly Average Daily Supply and Auction Prices of Live Pigs in the Past 12 Months，Slaughterhouses，2 January。https://www.fehd.gov.hk/english/sh/data/supply_avg_tw.html
