The clock is ticking on the biggest commodities rally of 2021.
US lean hog futures might be giving back much of their 60% rally for the year if China continues recovering from the viral outbreak that had crippled the pig herd in the world’s top pork consumer.
China’s live hog futures, launched just in January, hit their lowest levels for the year on Wednesday, falling nearly 5% as weak spot prices and expectations of improved production weighed on the market.
Analysts said large volumes of heavy pigs being sent to slaughter caused the weakness in spot prices, which have fallen sharply since the start of the year.
Spot prices of pork in China were quoted as low as 18 yuan ($2.80) per kilogramme, just about half of the 36 yuan ($5.60) per kg they fetched in early January when the ASF, or African Swine Fever, was still ripping through the country’s hog industry.
A tonne of live hog futures on the Dalian Commodity Exchange itself was down 4.7% on Wednesday at 23,580 yuan ($3,663.94) per tonne.
China’s Pig Supply Recovering
Sinolink Futures analyst Wang Xiaoyang was quoted saying on Reuters:
“The market expects that there will be more pigs going forward. Feed sales are pretty good, up from last year and also from the previous month... Most of the demand is from the pig sector.”
“Some people in the industry think that pig production might climb back to pre-ASF levels in the second half of the year, on the condition that there won’t be severe outbreaks in the south during the rainy season.”
But over in the United States, lean hog futures on the Chicago Mercantile Exchange aren’t showing any signs of breaking down yet after a stupendous rally for 2021 built up on the back of China’s ASF crisis.
CME lean hogs for July delivery hit their highest in nearly 7 years touching $1.1250 per lb. Year-to-date, the benchmark contract for US hogs is up 59.7%, largely helped by the Chinese crisis.
Since the swine fever first hit China’s hogs in August 2018, it's estimated that the infection has wiped out 60% of the herd in the world’s largest pork consumer as well as producer, which used to supply 30% of the world’s needs.
When China culled millions of pigs in 2020, it was not for their meat but to break the back of the virus. And it was US supply that provided the meat to pork lovers in China.
No Sign Of US Hog Futures Topping Anytime Soon
Veteran agricultural markets blogger Jim Wyckoff said in a post on industry portal thepigsite.com:
“Lean hog futures continue to set new contract highs and there are no strong, early technical clues to suggest the market will top out anytime soon.”
“Tightening US hog supplies and strong domestic and export demand for US pork continues to point futures higher.”
But Wyckoff acknowledged the concerns of disbelievers of the rally:
“Lean hog prices are in ‘thin air’ and history shows meteoric price gains do not last for long.”
On Thursday, the US Department of Agriculture reported weekly pork net sales of 48,200 metric tonnes for 2021, up 36% from the previous week and up noticeably from the prior four-week average.
Increases were primarily for Mexico, which rose by 19,400 million tonnes, with China remaining number two after a gain of 15,000 tonnes.
US Dept of Agriculture: China Hog Crisis To Last Till Mid 2021
The USDA also reported that swine numbers in China were not likely to rebound until at least mid-2021 if the ASF outbreak is brought under control.
“Some producers are delaying restocking their farms due to concerns about the new ASF strains and outbreaks, high piglet prices, and high feed costs.”
“These factors will likely slow China’s swine herd rebuild in 2021 and offer a counter perspective to recent statements made by Chinese officials.”
China’s current off-season for pork consumption was also weighing on its domestic demand for meat, trade sources told Reuters.
Yuan Song, research director at China-America Commodity Data Analytics said:
“Supplies are continuing to recover but demand has not kicked off.”
“Demand will eventually increase, but in the longer term prices will be on a downward cycle as the industry’s production capacity recovers and the number of sows rise.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.