Juggling Risks and Considerations in Hog and Pork Markets

When it comes to hog and pork markets, there is a huge amount of risk and a lot to consider. On one side of the spectrum, the potential for positive movement will depend on China and trade negotiations. On the other side of the spectrum, we have to consider African Swine Fever and the issues it presents. However, there are several factors in the middle which need to be considered as well.

African Swine Fever

This is the largest factor in global pork markets. China’s situation continues to worsen and the threat for entry to the U.S. becomes more and more prevalent. China is experiencing regional supply and demand imbalances unlike any they have ever seen before.

There are 18 officially reported cases of ASF in China. However, it is presumed numerous have gone unreported.

To keep the disease from spreading, the Chinese government has shut down the shipment of live hogs and meat across borders. This has resulted in an imbalance in supply and demand. This imbalance is driving down prices in northern China. In southern China, supplies are tight and prices are nearly double what they are in the north.

The impact on China’s pork production and import market depends on the speed the disease can be contained and in turn, how quickly transportation restrictions can be lifted.

If restrictions are lifted before January, the peak consumption season, production may only drop 2-4%. However, if they remain in place longer there could be a 6-8% drop. Even more daunting, if it takes the majority of 2019 to control ASF then it could fall 10-15%.

“If the supply gap falls by 4 million to 6 million (metric) tons, there is no country that can meet China’s demand, and China has to significantly increase pork imports from the U.S.,” said Chenjun Pan, a Hong Kong-based animal protein analyst at RaboResearch’s Food and Agribusiness group.

Another issue is Europe’s battle with ASF. Europe supplies 70% of China’s imports. If it continues to plague Europe, China may be forced to stop imports. This is yet another reason they would have to turn to the U.S. for supply.

China will most likely increase imports of other meats. This leaves a potential for the U.S. poultry industry.

U.S. Hog Supplies

Currently, the U.S. hog supply is falling just under expected numbers. Harvest numbers have been close to expectation since October, but have fallen short the past two weeks.

About 40,000 of the 100,000-head shortfall last week were due to winter weather on Nov. 26.

Overall, despite the lower harvest numbers we are still current on marketings. The hogs the USDA expected are just simply not out there as of now.

Global Crop Status

Harvest presented some challenges this year forcing the USDA to adjust crops lower. However, reports from South America are exceptional. Their second crop is expected to be planted on time and produce high yields.

A good South American crop will ease what pressure there is for world corn stocks. Additionally, soybean yields are expected to be big in the Southern Hemisphere. This will leave us drowning in soybeans.

Optimistic Futures or Too Much Risk

The optimist boasts huge increases in profits with new China trade negotiations and the potential for markets to open back up. Oppositely, some argue an ASF outbreak would bring prices down by as much as 75%.

There is a lot of risk involved in the decisions surrounding hog and pork markets. The question is, how much risk can you stand? This applies both financially and emotionally. It is important to weigh all options when making marketing decisions.

Hope for the New Year

Though hog producers are expected to struggle this winter, spring and summer sprout some optimism. The second and third quarters of 2019 should bring prices high enough for producers to make a profit.

Trade effects have hit the swine industry as hard as any. Beginning last summer, U.S. pork sales to China and Mexico took a huge hit. However, pork exports may be back on the rise. Total pork exports to all destinations are up 6% and sale commitments are also up by the same margin. Also, USMCA steadied the trade waters with Mexico and Canada.

New negotiations with China also provide hope for the swine industry. Additionally, the increase in ASF in China may force them to import more pork from the U.S. to compensate.

It is a reasonable conclusion to assume traders’ optimism is based on strong demand from a continuing strong world economy, by anticipation of resolution to trade disputes, and perhaps by African Swine Fever in China increasing global pork sales.

The futures price premiums for mid-2019 are extremely high relative to nearby futures.

This would seem to indicate that traders expect some major economic factors to increase hog prices by spring and summer. As an example, the July 2019 lean hog futures, near $84 on November 30, are about $26 higher than the nearby December 2018.

Overall, the U.S. will most likely be producing another record pork supply for 2019. Futures markets remain optimistic, but it will take more export and strong demand support to keep producers out of the red for 2019.