China's Hog Crisis - Concluding or Just Getting Started?

Note: This report was originally released on April 11th, 2019 to our subscribers. Subscribe or take a trial today to receive Special Reports like this on along with our Daily Commentary and Weekly Market Letter!

We continue to believe that African swine fever (ASF) has had a massive impact on pork production in China and that it will take a few years for the industry to recover. Over the next year, China is likely to be a consistent and active buyer of pork on the world market. This is likely to hold the hog market in an uptrend and also drive global pork exports to record amounts over the next year.

The ASF epidemic appears to be far more extensive than official reports suggest, and we will avoid counting on data from China for the time being. According to the Organization for Animal Health (OIE), the disease is highly contagious and can be 100% lethal to domesticated pigs. There is no vaccine, and it does not threaten human health. Once an outbreak is confirmed, all pigs at that specific operation must be culled.

The hog market seems to be shifting away from an “anticipation” phase to a “realization” phase. Traders will want to see either 1) actual sales of US pork to China or 2) higher pig prices in China for them to assume there will be another leg higher.

China’s Hog Herd Devastated

The most recent USDA Foreign Agriculture Service’s Livestock and Poultry: World Markets and Trade report, released on April 9th, put China’s 2019 pork production at 48.5 million tonnes, down 11.5% from last year and an 11-year low. Total swine stocks in China as of January 1st was estimated at 428.1 million head, down 3% from January 2018. The USDA expects that by the end of 2019 the herd will drop to 350 million head, an 18% decline and the lowest in 30 years.

On April 13th, the China's Ministry of Agriculture and Rural Affairs said that in March the pig herd had dropped 18.8% from the previous year and that the sow herd was down 21%. We have seen estimates that China’s pork production will be down anywhere from 15% to 30%, with the trade now seemingly leaning towards the higher end of that range.

Spreads Across Asia

In Vietnam, ASF has hit 23 provinces and cities, with 366 outbreaks reported as of April 2019. There have also been reports that nearly 10% of the Mongolian herd has now been destroyed. South Korea is banning people from bringing in livestock products in an effort to halt the spread of the disease. The US Pork Producers Council has cancelled its World Pork Expo, which was to be held in Des Moines in June, for fear of the disease spreading to the US. The virus has also been detected in pork products at a number of airports from Japan to Australia.

US Pork Exports to Increase

Facing a sharp decline in pork production, China is likely to increase its imports of pork. If China is forced to replace 10% of its normal pork production with imports and the US receives 25% of that business, US pork exports to China could swell to 257 million pounds per month. In the last seven years, US monthly pork exports to China have ranged from 5 to 83 million pounds. According to the USDA Foreign Agricultural Service's Global Agricultural Trade System, in 2018 US pork exports to all destinations ranged from 425 to 548 million pounds per month. Therefore, an increase to 257 million pounds to China alone could have a big impact on US pork prices. Even half of this total (128.5 million) would likely be enough to support a continued advance in the hog market to $105 to $110 per hundred-weight. It is important to keep in mind that in this scenario China would also be buying from Europe, Canada and Brazil, so it should drive global pork values higher as well.

In January, US exports totaled 477.76 million pounds (up 1.8% from last year), with China representing 23.48 million of that total. If China starts importing at the rate of 257 million pounds per month, then based on that January export figure, total US exports could reach 711.3 million pounds. The current record for any month is 547.9 million pounds.

If US pork exports reach those levels, per capita US supply for 2019 could fall to 46.9 pounds per person, down from the USDA’s current estimate of 52.3. This would be the lowest per capita supply since 2014. (In that year August 2014 hog prices reached a high of 133.37.) Even if China only replaces 5% of their normal production with imports, US per capita supply could still drop to 48.7 pounds.

In reality, if China’s production losses are 20-30%, they are likely to replace only 5-10% of the amount lost. Imports primarily arrive frozen, and only large cities have the freezers, cold storage and transportation facilities to handle a massive surge. In addition, demand for pork is likely to fall as prices rise and consumers switch to other forms of protein. Still, in 2007 China’s pork production declined 7% from the previous year in the wake of an outbreak of porcine reproductive and respiratory syndrome (PRRS), and their imports more than tripled.

Getting a trade deal done with China would likely boost US pork exports immediately. Already we have seen a dramatic increase in reported sales to China. This week’s USDA Export Sales report showed total US pork sales at 90,700 tonnes for the week ending April 4th versus an average of 27,975 tonnes over the previous four weeks. China bought 77,732 tonnes. Cumulative sales for 2019 have reached 591,500 tonnes, up 16.7% from last year. Sales to China have reached 142,845 tonnes, 24.3% of the total.

US and China Hog Prices Climb

China’s national average spot pig price as of April 10th was up 14% for the year so far and up 50% from a year ago. Their market recovered about half of the 2016 to 2018 break, which suggests that there is plenty of upside potential ahead. If supply is tightening in China, the cash market should continue to advance.

The US cash market is already in a steep uptrend, with the CME Lean Hog Index at 78.68 on April 5, up from 75.80 the previous week and up from 51.71 (+52%) on March 7.

The recent Commitments of Traders report showed managed money traders net long 36,791 contracts of Lean Hogs on April 2. The record net long is 97,952, so the market could still be a long way from overbought.

If the ASF crisis is as bad as reported, pork producers around the world could continue to see strong demand for their product.

Terry Roggensack
The Hightower Report