The table is set for some fireworks in the cash hog market this summer. The display could happen both before and after the Fourth of July. We now know, or think we know a lot more about the impact of African swine fever in China. The official Chinese number states that 900,000 pigs have been culled due to ASF. However, other data continue to bubble to the surface. The losses appear staggering. Officially, the Chinese government indicates that first quarter production was down 5%, but that quarterly production by the second half of the year will be dropping substantially.
Reports out of China have warned that pork prices are expected to jump 70%. They’ve further reported that sow numbers are down 21% compared to last year. This figure is the most startling number of all. This would suggest that over 8 million sows have been lost. For reference, the sow herd in the United States is estimated to be 6.4 million. The Chinese have liquidated more sows than what exist in the United States. Keep in mind these figures, if not accurate, are likely understating the losses rather than overstating them. Private analysts are projecting that pig losses this year could be as high as 200 million. These numbers are difficult to comprehend. That would be 30% more pigs than what we slaughtered last year.
How does the market, the global pork market, deal with this issue? First off, it must be noted that this is a long-term shift in the demand curve for pork. The demand curve is shifting upward and to the right for pork from the United States, Brazil, Canada and the European Union. This will remain in place not only for this year but next year and most likely the year after that. This is because ASF is still spreading not only in China but in other parts of Asia. Sadly, it’s running through Vietnam and Cambodia. It will likely spread further. Vietnam is home to 30 million pigs. The island nation of Taiwan is vulnerable, and is home to a pig population of around 10 million. The fact is that more than half of the pigs in the entire world are being threatened with ASF.
Second, one must understand that the protein gap we’re talking about cannot possibly be filled by pork-exporting countries. With the gap in production being discussed, if all the pork exports available in the world went only to China, and no one else, the gap would not be filled.
It’s my well-documented opinion that the world pork markets have yet to come to terms with the magnitude of this situation. The U.S. lean hog futures market has indeed awakened from its slumber. However, the job of rationing supply, through higher pork prices, remains at an infant stage. Further compounding the situation will be a lack of response on the part of producers not only in the United States but in Europe to expand their herds. The fear and very real threat that ASF will show up in commercial herds in Europe will prevent lenders from financing expansion even if market forces are suggesting such. In fact, the latest data showed Europe in a contraction. The same is likely to hold true in the U.S. market. Lenders, understandably, will be slow to finance expansion until significant profits have been achieved. Pork producers in the United States lost money from August through February.
The Chinese have clearly started shopping for pork on the world market. Canadian pork is tariff-free, and the Chinese have been in the Canadian pork market aggressively. They have been securing pork from Brazil and from Europe. Recently they purchased 77,700 metric tons from the United States which is their largest weekly purchase ever recorded. The following week they purchased 23,500 mt. Chinese export sales commitments on the books now total 166,000 mt compared to about 8,000 total last year. The aggressive purchases are expected to continue. The key, however, is when will large shipments actually begin? No doubt the 62% tariff on U.S. pork is causing shipments to be delayed. Assuming a trade deal is reached with China, and signed by early June, massive shipments would then be expected. If this occurs during the summer months, as butcher hog supplies are declining, cash hog prices would have the potential to move sharply higher.
As our other export customers begin to realize this, look for aggressive purchasing and shipments to occur sooner rather than later. Better to get hold of U.S. pork now, before prices shoot sharply higher than later. So suddenly everyone is eager to secure U.S. pork not only because it’s disease-free but because the world will realize that pork, in the next several years will never be cheaper than it is right now.
Finally, despite the sharp rally that has occurred off the February lows (roughly $27 in the June contract), in my opinion the U.S. lean hog futures market is still not realizing the tidal wave of demand, a tsunami of demand that is about to hit the market. If massive pork shipments to China begin in earnest this summer, just as butcher hog supplies are declining, cash hog prices likely will spike sharply higher.