October 28, 2019
In the summer of 1972, I was a high school-aged kid working for my uncle who farmed his ground and my grandparents’ ground in Jasper County, Ill. It was late-July. Wheat harvest was complete. We had been especially busy on either side of the Fourth of July harvesting my uncle’s wheat and he also did a fair amount of custom combining.
By the way, as a side note, this is when I saw for the first time a moldboard plow perform as we turned wheat stubble into rich black soil in one pass. Moving back to the subject at hand, after wheat harvest was completed that summer, “The Great Russian Grain Robbery” occurred. As a kid I had trouble understanding, completely, what had happened. I knew by the anger my uncle displayed it was not something good.
The U.S. government had issued the Soviet Union a line of credit for purchasing grain. As I recall it was a two-year line of credit with some subsidized pricing involved to encourage them to become a regular customer of the U.S. farmer. Then what happened shocked everyone. The Soviets had suffered a drought and had a very poor wheat crop. The seriousness of the situation was unknown to everyone except, of course, the Soviets themselves. They quietly contacted the big three grain firms and used their entire line of credit in one fell swoop. They purchased one-quarter of the entire wheat crop. The deal was kept completely under wraps until most of the wheat had moved from farmer hands into commercial hands. When the deal finally leaked to the public, and to the market itself, prices shot sharply higher to the dismay of the U.S. farmer. Shortly afterward, the USDA implemented the rule stipulating that large export sales had to be announced within a very short time frame. This led to the advent of the weekly export sales report which is still in play today.
Because meat exports are becoming such an important part of the pork, beef and poultry markets, these weekly export sales reports are watched closely by the trade. Recently, some serious questions arose when huge weekly exports of pork were announced. The numbers were sky high and off the charts compared to recent activity. The Foreign Agricultural Service issued a note with this report indicating that past sales and shipments, which had previously not been reported, were accumulated together on this particular report. Really?!
The FAS went on to explain that new exporters are constantly being added to the data set. These exporters may have not known about the program or may have not participated in the program. Keep in mind, the Chinese have a huge incentive to do everything possible to keep the price of pork as low as possible for as long as possible. Achieving this, apparently, occurs through many different strategies. This will never be known as the “Great Chinese Pork Robbery,” but the influence is similar. It appears highly likely that pork export business was hidden from the market place for a period of several weeks.
As a livestock broker and analyst with more than 30 years’ experience, the outbreak of African swine fever, first in China and then throughout most of Asia, represents the single biggest fundamental story I’ve ever covered. My first big event as a broker was Chernobyl. Yes, I’ve been around a while. The lean hog futures market is having a very difficult time quantifying the potential impact this story will have on the U.S. hog market. Frankly, when prices ran upward wildly in the spring of this year, only to collapse back downward, much of the speculative money has left the market. It would appear that only a select few actually believe this story to be extremely bullish.
Hog prices and pork prices in China are record high. Prices have accelerated to the upside with prices in October up over 40%. Pork prices are up 106% for the year. In addition, it appears highly likely that the impact from ASF will be long lasting. It will likely take years to eradicate this disease. Efforts to re-populate will be slow going as the disease continues to spread, continues to circulate.
The Chinese government wishes just the opposite. They desire and in fact they’re demanding a quick recovery in pork production. Just because the government is demanding this to occur does not mean it will occur. This disease has been detected in every province in China and Vietnam. Despite the commands of the Chinese government, a full recovery from this devastation will likely take several years not several months.
Regardless of the success or non-success of repopulation efforts by Chinese pork producers, it is highly likely that huge amounts of U.S. pork will be shipped to China in the next several months. The futures market has demonstrated that it won’t move higher until the product is actually shipped. The cash market and cutout values will tell the story. Eventually the front end of the market should lead all contracts higher. The eventual highs may be disappointing when compared to the highs reached in 2014, but nevertheless, higher prices should prevail.
The U.S. hog industry continues to expand as demonstrated in the recent Hogs and Pigs Report. This expansion is now entering its fourth year. Strangely, this expansion has not been fueled by widespread profits as one would expect according to economic theory. Instead the expansion has occurred simply to match the increases in slaughter capacity. Indeed, record large hog production is what will stifle the rally in hog prices triggered by ASF spreading throughout Asia. Too bad. Hog prices in the European Union are sharply higher than prices in the United States, yet European hog producers are not expanding. Indeed, they’re reaping the full benefit of rapidly rising demand for their product in a tariff-free environment. U.S. pork prices are substantially cheaper than prices in the EU. In fact, the Chinese can purchase U.S. pork, pay the 60% tariff, and still secure U.S. pork at lower cost that they can European pork.
I’m calling for a seasonal low in hog futures by the end of October. The next major seasonal high can be expected at the end of November. As butcher hog supplies drop off from 105% of last year to only 102% of last year, and as U.S. pork exports continue to escalate, prices should embark upon an impressive rally despite record large production.
Smithfield Foods is solely owned by WH Group, a Chinese company. Smithfield is the largest pork producer in the United States. They market about 20.6 million hogs a year. This is about 20% of the U.S. market or one out of five hogs is a Smithfield hog. The company has streamlined their production to a totally ractopamine-free pork supply. This was done for only one reason, so they can export to China. Recently Smithfield executives have been on record stating that China is expected to demand large quantities of Smithfield pork. They further indicated when this occurs, they will prioritize supply to their domestic customers. In the same statement, however, they warned of an upcoming bacon shortage. Frozen belly stocks, by the way, last week were reported at a 48-year high. For Smithfield to be warning of an impending bacon shortage in the face of the largest frozen stocks since 1971 is a major statement.
JBS, a packer that is responsible for about 18% of hog production in the United States, announced Sept. 30. in a letter to customers, that effective Jan. 1 they’ll no longer accept any pigs exposed to the feed additive ractopamine. The reason is obvious, they’re preparing to ship large amounts of pork to China. Finally, on Oct. 17, Tyson, the third largest pork producer in the United States, announced that effective Feb. 4 they’ll no longer handle and process pigs fed ractopamine. So, the table is set for a dramatic increase in pork exports to China.
Yet, despite all of this evidence of a massive increase in export business just around the corner, many in the industry and many in the trade remain bearish toward lean hog prices because of record large production. It can be said, with a high degree of confidence, that if ASF did not hit China last year, this year all hog producers would be deeply underwater due to over production. Make no mistake, to quote Vice President Mike Pence from a recent speech, “China is a strategic and economic rival”. Indeed, the potential for a massive cover-up, a “Great Chinese Pork Robbery” certainly exists.
The fact that exporters recently forgot to report several weeks’ worth of pork sales and shipments is likely just the beginning. U.S. pork is cheap, incredibly cheap, and priced substantially lower than European pork. A trade war and resulting 60% tariff stands in the way of China obtaining huge quantities of pork that they desperately need. It’s going to happen, perhaps already has. They will get their hands on huge quantities of U.S. pork, eventually. I just hope the U.S. hog producer gets paid a just and fair price.
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.
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