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Hog market disastrous without China, analysts say

With large supplies expected this fall, the U.S. hog market is relying heavily on China purchases, analysts said on Tuesday.

As of this week, U.S. hog slaughter is 1.3 million ahead of last year. As a result, more hogs will be available in the next two to three months, analysts said.

Ron Plain, University of Missouri livestock economist, said China's higher domestic feed costs and the blue tongue disease position it as big pork buyers.

"China is expected to purchase twice as much pork from the U.S. as they did last year," Plain said. "Those purchases are going to come in the second half of 2007."

The Chicago Mercantile Exchange futures prices are signaling a need for China's influx of pork purchases, analysts said.

The August/October price spread is much smaller than normal as is the October/December spread. The market is anticipating a small decline in prices as the end of the year approaches.

However, this is predicated on the expectations of large China pork purchases.

"I sure hope China comes through, otherwise we're going to see much lower prices than the futures market is predicting," Plain said.

Because China doesn't accept pork produced by Paylean-fed hogs, the coast isn't exactly clear for U.S. pork. About half of all U.S. hogs are fed with Paylean, a feed additive.

"China is struggling with fast-growing food prices. They want to slow that growth, avoid a food shortage, and the best way to do that is to import pork," Plain said.

In addition, Chinese officials on Tuesday issued regulations governing the management of the country's meat reserves system. The regulations cover pork. It's said to be a move that comes as food prices, namely pork, go higher, according to the Dow Jones newswire.

Barry Schmidt is the director of livestock research for Iowa Grain Co. in Chicago. Schmidt said the hog market has taken back the China-driven premium in the October futures contract. In fact, the October futures contract has retreated $7.00 from its high.

"Smithfield is expected to get the bulk of the China business," Schmidt said. "The questions are whether they can fill the Paylean-free pork request from China. Plus, will China have enough refrigeration for a large amount of pork-filled containers?"

As of Tuesday mid-day, the CME October futures hog contract was trading $1.05 lower at $70.35 per hundredweight. On August 3, the October contract reached a high of $77.70.

Seasonally, the hog market sets its low for the year in August, knowing large supplies are coming in the fall. Then, a rally occurs from the last part of August to the early part of October. A price break follows into mid-November, and then prices stabilize to the end of the year.

With large supplies expected this fall, the U.S. hog market is relying heavily on China purchases, analysts said on Tuesday.

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