China's farm recovery is a state-engineered one. That makes it fragile

PRICES ARE RISING, but not for the reasons the headline implies. Two of China's most important agricultural commodities - pork and raw milk - have spent years in a deflationary spiral that has now, haltingly, stopped falling. That is true enough. The deeper story is more disquieting: the recovery is being engineered by the state from above, in response to a surplus the state encouraged from below. And the demand that will test whether these recovered prices last is weaker than it was when the boom was built.

China's hog sector tells the clearest story. The breeding sow herd has been shrinking fast. It fell from 40.6 million head in January 2025 to 37.8 million by the end of the second quarter of this year, a cumulative decline of nearly 7%, according to the National Bureau of Statistics. The government has set a target of 36.5 million sows. Prices, which had plunged to 9 yuan per kilogram in April - a near ten-year low, well below the break-even of roughly 12 yuan - have stabilised since April and briefly rallied above 12.8 yuan at the start of the year. From April onwards, the authorities also initiated purchases of pork for strategic reserves, a familiar mechanism to prop up prices.

The mechanism is textbook capacity destruction. When prices fall below cost for long enough, farmers cull, small operators exit, and supply contracts. What is unusual is the speed and the hand of the state. The Agriculture Minister urged breeders in April to meet production-capacity reduction targets. Credit and subsidies are restricted. The top listed pig companies - Muyuan, Wens, New Hope - are all reducing breeding-sow inventories. The 14 largest listed pig firms collectively lost more than 15 billion yuan in the first half of the year. Painful as that is, it is precisely the sort of loss the government needed to force the herd down.

To be sure, this is the pig cycle at work. China's hog industry has been through boom-and-bust episodes for decades. The current squeeze began when productivity gains and expansion in 2025 rolled into 2026, pushing first-quarter pork output up 4.2% year on year to 16.7 million tonnes. Supply outpaced demand. The usual response is to wait for losses to clear the laggards. This time, the state is not waiting.

Yet the recovery is not the same thing as a healthy cycle. The trouble is on the demand side. Consumers have been shifting towards cheaper proteins - eggs, tofu, soy-based substitutes. Pork consumption has been declining in 2026, according to the Agriculture and Rural Affairs Ministry, and the foodservice sector where much of China's pork is consumed has been listless. A price rebound against weaker demand is a fragile one. The upside will be limited.

A similar pattern plays out in dairy. For three years, Chinese raw milk prices have fallen as the sector, buoyed by Beijing's food-self-sufficiency ambitions since 2018, expanded into a demand trough. Milk output surged from 30.4 million tonnes in 2017 to nearly 42 million last year, surpassing the government's own 2025 target. Prices dropped below the average production cost of around 3.8 yuan per kilogram, roughly double the cost in New Zealand. Farms that could not survive were culled or shut; some crossbred dairy cows with beef cattle to hedge losses. The industry culled approximately 300,000 cows in 2025 alone.

The signal that the worst may be over is instructive. In 2024, at the height of the oversupply, over 10,000 tonnes of fresh milk were being spray-dried into powder daily for storage - a costly way of parking excess supply. Today, according to farm managers quoted by Cailian Press, spray-drying has virtually stopped. Raw milk procurement prices in April were 3.02 yuan per kilogram, down just 0.3% month on month and 1.6% year on year. The rate of decline has narrowed dramatically. Brokerage research reports and industry experts, including the chairman of TERUN Dairy, believe the trough occurred between late 2025 and early 2026.

But, as with pork, the recovery has political scaffolding. China imposed anti-subsidy tariffs on EU dairy products in December 2025, initially as high as 42.7% before final rates in February settled at 11.7%. The tariffs were framed as a trade countermeasure against European action on Chinese electric vehicles, but their timing conveniently made EU imports more expensive just as domestic farmers needed relief. The effect is protectionism dressed as statecraft.

The second-order complication is that supply-side tightening is not enough when demand is structurally weaker than it was at the top of the cycle. China's dairy consumption fell from 14.4 kilograms per capita in 2021 to 12.4 kg in 2022, as the economy slowed and birth rates cratered - from 12.43 per 1,000 people in 2017 to a record low of 6.39 in 2023. Fewer babies mean less formula. Fewer middle-class consumers at the table mean less cream, less cheese, less premium milk. The demand destruction is demographic, not cyclical.

The result is a familiar asymmetry. Leading dairy processors - YiLi and its larger peers - are already reporting record profits or a return to profitability as they buy cheap milk from distressed farms. Upstream producers, however, remain cold. The margin flows downstream. Capacity clears at the bottom, rents accumulate at the top. That is not a recovery; it is a redistribution.

The broader picture is sobering. China's consumer-price index rose 1.0% year on year in June, but the food component fell 1.6%. Pig and milk prices are ticking up, but they are not yet doing enough to turn the food deflation that the government fears. The state's response - cull the herd, tax the imports, buy the reserves - is a set of short-term price supports. None of them addresses the demand problem.

The question for Beijing is what to do next. On the hog side, the sow herd reduction is likely to ease supply pressure in the second half of the year and into 2027, and industry researchers expect prices to gradually rebound. But the ceiling on that rebound is set by consumer willingness to pay, which has been declining. On the dairy side, capacity clearing is further along, but the structural headwinds - falling births, weak premium consumption, costs that are twice the New Zealand benchmark - are unlikely to reverse.

A wiser policy would acknowledge that the surplus was self-inflicted. The food-self-sufficiency drive that encouraged expansion should now be adapted to the new demographic and economic reality. The aim should be a smaller, more efficient sector rather than a large one propped up by tariffs and reserve purchases. Letting small farms exit the market is not a tragedy; it is the mechanism by which cycles clear. Preventing them from re-entering at the next sign of price recovery is harder, but it would break the boom-and-bust loop that has defined both industries for years.

The recovery in hog and milk prices is real enough. It is also a reminder that the state which built the surplus can engineer its destruction - but only at the cost of farm losses, consumer caution, and a demand base that has quietly moved on.