Pork packers fooled me once

Cool weather has certainly been one factor contributing to the increased weight but poor exports are likely the main factor.

Dennis Smith

June 24, 2019

3 Min Read
Pork packers fooled me once
National Pork Board

Fool me once, shame on you. Fool me twice, shame on me. I was told, and I believed it, that packers were shutting down plants, on and off all spring to retool for shipment to China. Instead, it appears packers were simply tapping on the brakes, controlling the kill in an effort to prevent cutout from dropping and thus keeping margins as high as possible for as long as possible. Of course the packer always has two fingers on the wrist, they’re able to consistently take the pulse of the demand side of pork. We’re on the outside looking in, we don’t have two fingers on the wrist. So packers knew that export demand was lousy. We now know that export demand was lousy, but too late.

The net result is an industry that has backed up hogs and created a real mess. Hog weights, for the past few weeks, have been running six to eight pounds above year-ago weights. This should never happen in the summer. Cool weather has certainly been one factor contributing to the increased weight but poor exports are likely the main factor. It would appear that current policies are benefiting our competitors. Pork exports out of Brazil are up 40% to China. Pork exports out of the European Union to China, in the first quarter, were up 25%. Total U.S. pork exports during the first quarter were down 6.4% and exports during April were down 4%.

In the middle of a sharp down trend in hog futures, I’m hesitant to even mention African swine fever. Indeed, it appears this disease that is systematically killing and destroying half of the world pig population does not matter. At least that’s the perception right now.

ASF continues to spread in China and in Vietnam. The disease has been confirmed in Cambodia and in North Korea. Just recently it was confirmed in Laos. Many in the industry expect it to be confirmed shortly in Thailand and possibly make its way into South Korea. Part of the problem is that we really don’t know how many pigs have died and have been culled in an effort to prevent the spread of the disease. Spending hours trying to quantify the losses is meaningless. The market, someday, will answer these questions.

Highly respected analysts from Rabobank expect U.S. pork shipments to China to accelerate starting in the second half of July and of course continuing for months, if not years. The CEO of Tyson, in conference calls recently, suggests massively large shipments won’t begin until the fourth quarter. These comments really spooked the futures market. China has already purchased massive amounts of pork but it’s not been shipped. To date the Chinese have purchased 254,000 metric tons of U.S. pork but only shipped 91,000 mt. Mexico, traditionally our largest pork customer, has purchased 221,000 mt and shipped 160,000. So the Tyson comments now have the trade fearful that large quantities will be canceled or at least diverted to next year.

The commodity markets in general, and the hog market in particular, can be extremely complicated. In an effort to deal with this, I tend to work to simplify as much as possible. My line in the sand is $87 in the July hogs. This price level is the June highs. Until or unless the July takes out this level, there’s no reason to be bullish. Same will go for the August hogs if July expires without taking out this upper resistance level. Someday, assuming the United States remains disease-free, hog prices will move sharply higher as China will be forced to purchase and ship U.S. pork.   

Source: Dennis Smith, 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.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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