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China disappointment Round 3

This weekend’s directives for state-owned companies to refrain from buying U.S. products is, no doubt, problematic.

We can’t talk about pork industry economics today without acknowledging the debacle that befell lean hogs futures last week. How bad was it? Just the worst week in the history of hog futures. Every contract lost at least $8.075 and the December contract fell $14.85 per hundredweight or 19% from its previous weekly close on July 26. And there is no guarantee it doesn’t continue today. At this writing August and December are up some, while every other contract but May is down. 

And all of this happened as USDA’s estimated cutout value gained 5.4% and cash hogs gained 5 to 7%, depending on which series you considered. 

What happened?
Tweets happened. At least that is the most obvious issue. President Trump’s imposition of 10% duties on another $300 billion of Chinese goods and the generally negative vibes of everything related to trade last week were either the spark that lit the fire or fuel that made the conflagration larger. We aren’t sure which. Add in growing sentiment among traders that a) China hasn’t really lost that many hogs or b) China won’t ever buy more from the U.S. or c) both and you have a situation where the first sign of selling set off an avalanche. Call it “China disappointment Round 3.”  But this case of disappointment was far more acute than were Round 1 last fall and Round 2 in May throughJune.

We still believe China’s hog losses have been massive. Everyone that has been on the ground there supports that conclusion. Recent increases in China hog prices to near 20 renimbi/kg (and above that level in some areas) are the first signs that pre-emptive hog culling and declining frozen inventories are finally leading to some scarcity of pork products. China’s imports from the European Union, Canada (at least until the late June banning of Canadian product over falsified documentation) and Brazil have grown sharply. But China can’t buy all of the product in those countries and, even with tariffs on U.S. product, will have to buy significant quantities from the U.S. at some point. 

U.S. shipments to China were up 180% from one year ago in June (product weight data from USDA-FAS) and are now up 23.8% year-to-date. Value increases for those time periods are +204% and +13.1%, respectively. Pork variety meat exports to China were up 30% year over year in June and are now down “only” 10.% year-to-date. 

This weekend’s directives for state-owned companies to refrain from buying U.S. products is, no doubt, problematic. It remains to be seen if food needs will trump this nationalistic desire by the government of China. We use “nationalistic” here not as a pejorative term but simply as a statement of fact.

One thought: If you knew that your country was going to need large amounts of various products from a specific country, would you perhaps work on a plan to get the cost of those products lower before you really started buying them? There seems to me to be more than one way to perpetrate a great grain/soybean/pork/beef robbery – at least in theory. Did we see it last week?

The other longer-term issue is the situation with price reporting. Specifically, USDA has had a devil of a time publishing data in the Western Cornbelt reports in recent weeks due to its confidentiality rules. The unavailability of WCB prices is a huge problem for thousands of formula-based hogs that use various data as the base for producer price computations.

So what are the rules and why are they in place?
USDA developed the “3/70/20” rule shortly after mandatory price reporting began in 2001. It says USDA will publish price and quantity data only if:

  1. At least three reporting entities have provided data at least 50% of the time over the most recent 60-day time period.
  2. No single reporting entity may provide more then 70% of the data for a report over the most recent 60-day time period.
  3. No single reporting entity may be the sole reporting entity for an individual report more than 20% of the time over the most recent 60-day time period.

There are two reasons that confidentiality is important. First, price reporting is mandatory, meaning packers can’t simply opt out. Each packer is sharing information with USDA which would otherwise be confidential so USDA has to hold it confidential as well. When price reporting was voluntary, there were no such problems. If a packer didn’t like his/her info being included in the report, they could simply not report. That is not so with mandatory reporting. 

The second reason is the source of some confusion. USDA’s confidentiality efforts are not aimed at keeping packer data from producers. They are aimed at preventing packers from knowing with any precision what other packers are doing. Such knowledge could be used to “signal” one another in the marketplace and manipulate prices, both clear violations of price fixing prohibitions. 

The recent rub, however, has come from the Eastern Cornbelt where problems with these conditions are far more prevalent. If the ECB doesn’t print and the national and WCB do print, it doesn’t take a math wizard to figure what the ECB numbers are. Simple algebra arrives at the numbers very quickly. And if you are one of, say, two ECB packers reporting on the day in question, you can quickly ascertain exactly what your competition paid and how many he/she bought.   

So the WCB data has been unavailable due to the ECB data failing confidentiality conditions. USDA has proposed and circulated a “fix” to the problem, however. Their proposal is to publish a WCB weighted average price any time the WCB meets confidentiality conditions. When the ECB also meets the conditions, full data (volume, range, weighted average price) will be printed for both regions. When the ECB fails, only the WCB weighted average price will be published. The volume of various animals sold in the WCB will not be published, making it impossible to “back into” the confidential ECB data.

Does this fix the problem? Not really. It treats a symptom of a much larger and long-standing disease: Declining numbers of hogs selling in negotiated trades. The average of weekly data year-to-date is 1.75% of all hogs sold in negotiated trades. There was a day that I thought that number would not get much below 10% because producers would think the resulting data was so undependable that they would formulate fewer hogs and thus put more back into negotiated trade. And I thought that at 5% and then 3%. 

The numbers have now gotten so low that we don’t have enough buyers representing enough volume over the past 60 days to allow USDA to print reports. The change in USDA report procedures and formats will not cure the disease. Negotiating hogs is an expensive, time consuming, sometimes difficult activity. Fewer producers want to do it and one of the major players in the past, Prestage Farms, now slaughters most, if not all, of their own hogs. The direction here is not good.

USDA is doing their best to treat the symptoms. It will probably suffice for a while. Then?

Comments in this column are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals.
Source: Steve Meyer, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset.
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