Hong Kong should have a beef with its dodgy meat monopoly

There are no benefits to the city in Ng Fung Hong's privileged importer status and no good reason to suggest giving the firm subsidies

PUBLISHED : Friday, 30 November, 2012, 12:00am
UPDATED : Friday, 30 November, 2012, 2:53am

I am grateful to the reader who drew my attention to the letter in Monday's edition of the South China Morning Post headed "HK's economy benefits from beef monopoly".

The letter defended Hong Kong's monopoly importer of mainland beef cattle, Ng Fung Hong, a subsidiary of China Resources Enterprise.

The writer rejected calls for Ng Fung Hong's monopoly to be scrapped, arguing that its privileged status is not to blame for the recent rise in beef prices.

Beef prices are going up, he declared, because mainlanders are getting richer, and so are competing with Hong Kong's beef consumers, plus the yuan is appreciating against the Hong Kong dollar.

Far from gouging its customers, Ng Fung Hong helps keep prices down, because monopoly status gives it leverage with buyers and economies of scale. The monopoly is such a good thing, he concluded, that Hong Kong's government should give Ng Fung Hong a subsidy.

This argument is so wrong-headed, it's hard to know where to start.

First, Hong Kong's rising beef prices have little to do with competition from wealthy beef-eaters on the mainland.

Competition from mainland consumers might drive prices higher if beef supplies were fixed like, say, the global gold supplies. But beef supplies are remarkably elastic. If demand rises, farmers just breed more cows.

Second, yuan appreciation has no significant effect on the price of beef in Hong Kong. If you don't believe that, look at the first chart, which shows how tightly beef prices here shadow prices on the mainland. The yuan's movements don't come into it.

In fact, the biggest driver of beef prices both here and on the mainland is the price of cattle feed, which is set internationally.

You can see that if you look at the second chart, which plots fluctuations in US soya bean prices against changes in the Hong Kong price of mainland beef.

I could have used US corn instead of soya beans. The chart would have looked much the same: a rise in international feed prices leads a few months later to higher beef prices in Hong Kong. Falling feed prices mean cheaper beef.

In turn, feed prices are influenced largely by climatic factors like rainfall, and by energy prices.

Next, let's examine the curious notion that Ng Fung Hong's monopoly could be good for Hong Kong's economy.

Most people believe that monopolies can be good sometimes. For example we grant temporary monopolies in the form of patents to encourage people to invest in developing new technologies.

But cattle hardly count as new technology, and Ng Fung Hong can't exactly claim that cows are its own intellectual property.

Further, the letter's claim that Ng Fung Hong as a monopoly can demand lower prices from its suppliers is simply untrue.

A monopoly is the sole seller of a product, a position that allows it to demand higher prices from its customers.

To demand lower prices from sellers, you have to be a monopsony: the only buyer in the market.

And Ng Fung Hong is no monopsony. It is in competition with mainland beef buyers. If it tried to demand lower prices, its suppliers would just sell elsewhere.

Finally, we have the idea that government subsidies for Ng Fung Hong's monopoly would make beef more affordable.

Alas, subsidies, like monopolies only distort the market. That's why Indonesia, despite being a major oil producer, used to suffer chronic petrol shortages. The subsidised fuel was promptly bought up and sold abroad at market prices, leaving the domestic market without.

In short, there is nothing good about Hong Kong's beef monopoly. And a government subsidy would just make things worse.