Floods and the coronavirus create more uncertainty for China as food prices climb

Elevated food prices are just one of many new challenges China needs to face in the wake of the coronavirus outbreak.

Food prices rose 11.1% in June from a year ago, according to the National Bureau of Statistics. Weekly data from the Ministry of Commerce showed prices of agricultural food products rose 1.2% in the week ended July 5 from a week ago. Prices rose another 0.8% in the week through Sunday, according to Commerce Ministry data released Tuesday.

Authorities have been closely monitoring food prices as they are an important aspect of maintaining social stability.

From a business perspective, Covid-19 has particularly hit the food and beverage industry as efforts to limit the virus’ spread discouraged people from going out to eat. Many people have also shifted from ordering food online to cooking at home. 

In the first half of the year, 105,800 food and beverage-related businesses dissolved or suspended operations, with more than 70% of the closures occurring in the second quarter, according to data from Qichacha, which runs a Chinese business information database. Over 70% of 990,500 new registrations in the industry also occurred in the second quarter, but the percentage increase in closed businesses for the second quarter was greater than that of new registrations, according to CNBC analysis of the data.

The rise in food prices in China cuts into restaurant earnings by about 2 percentage points, according to estimates from Gao Huan, a senior director focused on retail and manufacturing at consulting firm Alvarez & Marsal in Beijing.

“The price increase is actually pretty real and it’s mainly driven by the decrease from the supply side and increase of the demand side,” she said in a phone interview on Monday. “Actually, this trend is most likely to continue as we see a lot of other natural disasters such as the flood in the south of China, which is having a lot of impact to the raw material. This is going to reflect (in) the market very soon.”

Severe floods, which some have described as the worst since at least 1998, have left at least 141 people dead or missing, according to state media. Direct economic losses have surpassed 86 billion yuan ($12.3 billion), with about 29,000 homes destroyed and more than 2.24 million emergency relocations, the report said. 

Over the weekend, Chinese President Xi Jinping described the flood situation as “grim” and that the response has entered a “critical” period, according to a CNBC translation of his remarks as reported by Chinese state media.

“We expect CPI inflation to inch up to 2.7% y-o-y in July as the supply shock of the recent flooding in South China may more than offset the high base in July 2019,” Nomura’s Chief China Economist Ting Lu said in a July 9 report. “However, we believe the downtrend in year-over-year CPI inflation will remain intact over H2 (to around 1% at year-end) due mainly to the higher base from surging pork prices in H2 2019.”

Analysts from Hangzhou-based Nanhua Futures, a brokerage, said in a note last week that the impact on food prices will only be in the short term, while the floods will have a greater effect on live pork production.

Prices for pork have more than doubled over the last 18 months as African swine fever caused a shortage of the Chinese meat staple. Pork prices remained elevated in June, up 81.6% from a year ago.

The prices remained high despite increased Chinese purchases of foreign food products. In the first half of the year, China’s imports of pork rose 140% from a year ago, while that of beef rose 42.9% and soybeans increased 17.9%, according to Customs Administration data released Tuesday.

The re-emergence of the coronavirus at a major produce market in Beijing has added additional upward pressure on food prices. Fresh produce prices rose 9% in June in the capital city, according to the municipal government.

The increase in pork and food prices overall boosted China’s consumer price index, a key measure of inflation, slightly higher in June to 2.5% from 2.4% in May. However, that was lower than the 5% and 4% levels seen in the first few months of the year. 

Zong Liang, chief researcher at the Bank of China, said in a phone interview on Monday that he expects the 2.5% CPI level reflects that inflation for the entire year will be less than 3%, which is a relatively stable figure. Zong was generally optimistic that any rise in food prices will be short-lived.

However, for the economy overall, developments such as the temporary re-emergence of the coronavirus will likely mean a more gradual return growth.

“The recovery of this market will be relatively stable, not very fast,” Zong said, according to a CNBC translation of his Mandarin-language remarks. 

For restaurants, it remains a difficult journey ahead as they navigate changes in food prices and consumer behavior.

“We already have observed a lot of the small and medium players are out of the game…. The reshuffling of the industry is going to continue,” Gao said. “The overall demand of the restaurant business is not fully recovered no matter how much people like to see that. Only 80%, 90% will return to normal. A lot of disadvantaged players will be out of the game.”

As a result, Gao said restaurants need to be more innovative in order to survive the post-coronavirus economy, by using strategies such as: tapping online sales channels and frozen food, improving supply chain efficiency and giving consumers enough assurance of quality and safety for them to dine out.