Hog Traders Eye China’s Swine Fever
China’s new action to help stem the tide of African Swine Fever findings caught the market’s attention.
The agriculture ministry announced it would immediately ban the transportation of live hogs in the affected provinces. It would also stop activity at live hog markets in the provinces. The country has five official findings, but all sectors of the world pork trade would likely agree there are more cases than reported by the government.
Bulgaria reported its first case of African Swine Fever today. They found seven backyard pigs in a town called Tutrakantsi. All 23 pigs will be culled in and near the village. This is located near the Romanian border. Romania has seen hundreds of cases since earlier this summer. Last week Romania reported it at its largest hog farm; 140,000 head had been ordered to be culled. Officially, this is not a story U.S. hog futures traders should be concerned about. In the current environment, where we are a bit too focused on the Chinese situation, it helps feed into the narrative of a new worldwide outbreak.
We have been clear with our stance on the issue with two seemingly contradictory statements:
1. We fully recognize the psychologically thrilling sounding stories can add upside to U.S. hog futures pricing. Let’s be honest – a significant percentage of both producers and futures traders simply want a bull market right now. Producers are getting hit with consistent and sharp losses right now.
Breakevens are at $62 per cwt. Western Corn belt hogs are currently priced at around $37 for free-market negotiated and up to $49 for hogs tied to USDA reports. No matter how you stack it, a $27 to $51 per head loss is ugly. On top of that, due to the normal rise in supply ahead and no signed NAFTA deal, losses won’t stop through the end of the year.
2. We do not believe any potentially higher prices stemming directly from ASF are a correct reason to rally.
Even though we fully expect many more ASF cases in the future, it won’t be anywhere near enough to impact the 700-million-head annual production. China has too many hogs. Chinese producers are trying to reign in overproduction. They went from record profits in 2016 that helped trigger overexpansion, to a loss period. They were losing money on hogs marketed from March through June.
They are currently back to a minor profit. Even if this does trigger a minor bump in imports, it won’t be from the U.S. The 2018 tariffs, along with their preexisting ones, put the import tax at around 80%.
On the other hand, let’s go back to point #1. Markets are determined by both actual fundamentals (supply/demand) and psychology. As an analyst, I will fully point out that I incorrectly favor the former of those two.
We won’t ignore the fact that 2018 hog supplies will be crushing. It is a fact. We will have another record in production. The factor that determines price, the supply finally hitting the U.S. consumer after net exports, will be the largest in 15 years.
We may find a bottom in the coming weeks, if not already in hand, but we’ll be back at low prices again in 2019 with even larger production. USDA’s 2019 estimate of pork left for the U.S. consumer ties the record supply from 20 years ago. The trade issues here simply happened at the worst time, right in the heart of a major pork expansion from 2015-2019. Even without trade issues ,we would still be eyeing losses in Q4 this year and certainly again next year.
The week’s hog kill ran 2.455 million head. That was right next to our morning estimate of 2.452. This kill number is 5.7% over last year. We now have three weeks in a row of big kills. These three weeks have run 5.1% to 7.7% over last year. Before this, the previous six-week period saw numbers 2.2% over last year.
Kill numbers will continue to rise seasonally until the peak just before Thanksgiving or just after. We will see kills top 2.6 million head before this is all said and done. Some suggest prices will continue nose-diving into fall on the coming big supply. Others suggest the trade-related discount that hog prices already have has already priced in the Q4 tonnage.
At the time of this writing, there is no trade deal with Canada. Talks have concluded and Canada’s foreign minister, Christina Freeland, will hold a solo press conference at 3:30 Central. We assume this will confirm the trade expectation of no deal.
From our understanding, Canada was unwilling to move on both the dispute resolution issue as well as its protectionist stance on agriculture. It’s not a major surprise and likely won’t break the market next week.
On a bright spot, cash hog prices are no longer in a free-fall. The Iowa/Minnesota report showed activity ranging from unchanged on Monday to losses from 3¢ to 7¢ daily from Tuesday through Thursday. Thursday’s price for that report was 36.74. Last year on the same date it was at 63.83. Last year’s low was an early on, September 27 at 47.72 for that cash hog report. With a Mexico deal, we suggest $55 for the December. The market is there. On the charts there is an open gap on the December from $49.67-$50.07. If we see that filled, it would represent a good longer term buying opportunity, until next summer’s peak.
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