According to the Chinese Zodiac, 2019 is the Year of the Pig. This year has certainly lived up to its name. The discovery and subsequent outbreaks of the African Swine Fever (ASF) virus in China in August 2018 sent shockwaves through the hog market. ASF is a highly contagious virus that ravages hog herds and currently has no cure.
The price of US hog futures surged by 67% during March-April as the scale of the potential losses became clearer. Since then though prices have retraced 50% of the earlier spike higher, falling back to around 70 cents per lb.
In the past week estimates provided to Reuters have suggested that as many as half of China’s breeding pigs have either died from the disease or have been slaughtered because of the spreading disease, much higher than previously thought. Despite this the markets reaction has been muted.
The problem for hog futures is that the US market is fundamentally oversupplied. The US hog herd is at its highest level since 1943. American producers had been building up their herds in anticipation of increased demand from China. The US-China trade war has muted that response, but there are signs that things could improve.
Meanwhile, China’s pork prices had been kept under control through a combination of releasing stock from its frozen pork reserve (much like the US has Strategic Petroleum Reserve, China has one for pork), and secondly farmers sending pigs to be culled early, especially if the disease was discovered on a local farm. As frozen stocks run low and with no more room for more supply then prices have started to rise. China’s agricultural ministry has said prices could surge by 70% in coming months as a result of the outbreak.
China’s imports of pork and swine offal from the US in May jumped to the highest in at least a year, exceeding the level before Beijing’s hefty 62% retaliatory tariffs were imposed in July last year. China’s total meat imports also hit a record in May as looming meat shortages drove up domestic prices. Nevertheless, tariffs are likely to mean that other hog producing regions like Europe and Brazil are likely to benefit most from Chinese import demand.
Instead, the US hog market may also see strong export support from other countries affected by ASF. Outbreaks of the disease have been detected in parts of Southeast Asia, Japan, Poland and Russia. According to Capital Economics pork represents around 2% of the consumer price index basket in many of these countries (vs 3.5% in China and 1% in most other emerging economies).
The longer term hog chart offers some useful insights as to the upside potential. Overall, it suggests that unless ASF (or another disease) spreads to the US, Europe or Brazil then it is very unlikely that prices will go much above current levels, at least not for any sustained period. Apart from a few very brief periods over the past two decades the price of hog futures has typically bounced between 50 and 90 cents per lb. Seasonal demand and supply fluctuations typically resulting in higher prices in the spring/summer and lower prices in the autumn. The only time hog futures have been outside of this range for a significant period was in 2014 when disease struck. Back then the PED virus decimated the pig herd causing prices to hit a record high just over 130 cents per lb in July 2014.
Another factor likely to limit any future upside price response is the substitution effect. Recent statistics from Shandong, China’s largest feed producing province show that farmers have indeed cut back on hog production, but the drop in output has been offset by an increase in poultry output. China’s poultry consumption has increased in recent years, as demographic changes, growing wealth and urbanisation contributing towards the trend. Indeed, the outbreak of ASF may accelerate these longer term trends. According to a recent report from Mizuho the nation’s consumers “aren’t discriminating between a disease that only affects the hog and what can be transmitted to humans,” turning them off from wanting to eat pork and reducing consumption.
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