Traders in the lean hog markets have waged a battle whether China will begin importing massive amounts of pork in the near future or not. China is in great need of replacement pork as much of their herd was wiped out this year due to the swine flu. China has a healthy appetite for pork and it seems like it is only a matter of time before they turn to the US to buy a massive amount of pork. The question is when?
This US currently has the lowest prices for pork worldwide. China’s pork prices have soared this year and are currently about three times that of the US. The lean hog futures markets rallied earlier this year on expectations China would have to come to the US for major purchases. However, trade and tariff issues with China reached a boiling point and those expectations turned to doubt.
The market has been bouncing around in a range the last month. The highs and lows of the range were briefly penetrated just enough to sucker some folks in to chasing the market. Now, it looks like the hogs are posting a fairly sharp reversal from the lows and may have put in a seasonal bottom. The news on the China trade front has become friendlier and China could ramp up their purchases in the next couple months. That is not a given, but the markets are starting to lean more that way. Dec lean hog futures opened limit up 300 points today, September 12th as it looks like the tide could be turning in favor of the bulls.
Oversupply or Massive China Buying of Hogs?
A good case can be made that the market is well supplied with hogs this year and prices could go lower from here. That is why prices fell sharply when the trade issues with China surfaced. If China is removed from the equation, hog prices could have more room to fall. However, if China becomes a major buyer into next year, hog prices could be much undervalued at these levels.
It seems to make more sense that China has to turn to the US for supply. China has made statements they will provide state funds to rebuild their herd and get supply back to previous levels. That sounds great, but it is fairly unrealistic at least in the next year or so. Other parts of Asia like Vietnam are also suffering from losses of the swine flu and it only makes sense that world supplies will drop substantially. The US is the likely source to fill the supply gap going into next year.
It again boils down to whether a trader wants to focus on the supply and demand equation in the US and ignoring China until next year. The trend has been down for hog prices and the current consolidation is likely either a pause before another leg lower or it is a bottoming process before the market has a strong run higher.
It might be dangerous to get caught short this market if China begins a major buying spree of pork from the US. It looks like they are dipping their toes in the water and sales were strong in the latest weekly numbers with China the largest buyer. China bought 10,900 MT of the 21,900 sales/bookings. That may very well continue as long as the tariff talks remain fairly calm or at least more friendly between the US and China. Even with the tariffs, US pork prices are still about $1.50/lb. cheaper than China’s prices.
A breakout of the high end of the consolidation range could be confirmation that prices are going higher. It will be interesting to see who wins this tug of war. The near term fundamentals favor the bears unless China buying continues. The long term fundamentals favor the bulls as China will eventually have to seek supplies outside their country. I believe the negatives could already be priced into the market and the upside looks much more attractive than the downside risk.
