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Todd's Take
Monday, March 25, 2019 10:58AM CDT
By Todd Hultman
DTN Lead Analyst

Just four months after China's government and USDA said "oops," there's actually 5.9 billion bushels (bb) more corn in China than we previously estimated, we are once again being asked to assess inventory estimates for a tight-lipped Asian competitor that may or may not be accurate.

This time the attention is on the number of hogs in China.

The pressing issue is African swine fever (ASF), a highly infectious disease that is lethal to swine and has no protective vaccine. The disease is not considered harmful to humans, but puts the entire world's hog supply at risk.

On Wednesday, DTN Political Correspondent Jerry Hagstrom explained cautionary measures that the U.S. government is taking to prevent ASF from coming to this country (see https://www.dtnpf.com/…).

While current concerns of ASF focus on China and Vietnam, outbreaks are not new to the world. According to Wikipedia, ASF spread from Africa to Europe in 1957 and was not contained in Europe until the mid-1990s thanks to a rigorous program of eradication.

Since then, ASF has been identified in South America, the Caribbean, Russia, Ukraine and several areas around western Asia, and has returned to 10 countries in the European Union. Areas where hogs roam freely have proven especially difficult for containing the spread of ASF.

Making a sober market assessment of the current ASF situation is extremely difficult as the mix of China, an incurable disease and big hog losses create a powder keg of emotion, ripe for imagination. It also hasn't helped that published estimates are often not based on anything substantial and rarely similar to one another.

Here is what USDA's attache from Beijing reported about China on March 11:

"By the end of 2019, the total swine inventory will be down 13% to 374 million head. Pork production will decrease by 5% to 51.4 million metric tons (mmt), with the reduced supply only slightly offset by weakened demand. To cover the domestic supply gap, China will increase pork imports by 33% to 2 mmt." https://gain.fas.usda.gov/…

As a slight tweak to the attache's report, USDA's Livestock and Poultry: World Markets and Trade shows China imported 1.75 mmt of pork in 2018 so 2.0 mmt of imports would represent a 250,000 metric tons (mt) or 14% increase in 2019, if true.

At first blush, the attache's estimated reductions are not catastrophic in terms of world or U.S. impact. The U.S. exported 2.72 mmt of pork in 2018 and getting part of China's 250,000-mt import increase would be helpful but not dramatic.

Many will argue that the attache has severely underestimated the problem and that debate will continue. Since ASF has no cure, no one can argue that the problem can't get worse. That open-endedness gives prices a lot of bullish fuel, whether it is deserved or not. This is a dangerous market environment for both bulls and bears.

How accurate are the attache's numbers? They're probably as accurate as USDA's estimate of China's corn stocks was in October. For now, they may be the best guess a fundamental analyst has to work with, but we also have other clues to consider.

USDA's weekly report of export sales may not be the timeliest indicator, but it will likely be the most reliable indication of how China's problem will actually affect U.S. pork demand. It is no small coincidence that July hog prices surged even higher after USDA reported large pork export sales of 23,800 mt to China on March 14. The 3,000-mt sale to China reported Thursday was not as spectacular, but the market's bullish fever did not back down as July hogs closed up another 4.50 cents at $97.57.

Friday afternoon's Commitments of Traders report from the CFTC will be especially interesting, showing us the latest response from noncommercials. That speculative group was late to the party, but is now likely net long after missing obvious bullish signals earlier in March. CFTC data showed noncommercials were still net short 3,447 contracts on March 12 when the July hog contract was already above its 100-day average and posting its highest close in two months.

I also find it interesting that spot lean hog futures were down 15% in 2018, the third worst performer among commodity contracts that year and a prime candidate to trade higher in 2019 (see "Commodity Price Clues For 2019" at https://www.dtnpf.com/…).

I can't vouch for the number of hogs in China, and the emotional aspect of this market adds an element of danger. Even so, it is no stretch to recognize the bullish potential of this month's hog rally, knowing that concerns about Asian pork supplies are credible and cash hog prices typically peak around July.

If USDA's attache in Beijing is close to being correct, this rally may not have much further to go -- but nobody can be certain. The way the market is now, and knowing there is no cure for ASF, it is more dangerous to be short lean hogs than it is to be long.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

Comments above are not meant to be specific trade recommendations. The buying and selling of commodities and commodity futures involve substantial risk and are not suitable for everyone.


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