Market outlook for China
Pork situation in ChinaBy Dennis Smith
I listened to a podcast on China recently. The individual has lived in China or Hong Kong for the last 34 years. He certainly knows more about China than most of the traders in lean hog futures, including myself.
However, he admitted that he really does not know what’s happening to the Chinese hog herd in terms of African swine fever. He alluded to the theory that China is so huge that many inside China likely don’t know the status of ASF. He admitted they successfully moved beyond the crippling disease, and this should not be ignored.
Talk about uncertainty. He suggested a major problem has been reduced pork consumption as a direct result of the very poor performing Chinese economy.
He further explained that the Chinese invest heavily in real estate like U.S. citizens invest in the stock market. Real estate values have been dropping since COVID, contributing to a very low consumer confidence level.
The exception to reduced meat consumption is beef. The wealthy and upper middle class in China continue to increase beef consumption, especially heavily marbled, grain fed beef. The chart of self-sufficiency indicated that beef consumption is rising much faster than Chinese beef production. China is forced to import more and more beef every year and this is expected to continue.
Recent hog slaughter data released by the Ag Ministry reported November slaughter levels up more than 40% compared to November of 2022. The only explanation that we can attribute this to is panic market hog liquidation as disease spreads and massive sow liquidation. Nothing else is available to explain such a surge in the monthly kill. Uncertainty, China is full of uncertainty.
In the meantime, the U.S. hog market is caught in a buzz saw of bearish fundamental news. The U.S. cattle herd is down 9% over the last four years but the hog herd is down only 1%. The culling rate is much lower than the increasing rate of pigs per litter, so production is rising as sows are liquidated.
No doubt the cull starts with older and less efficient breeding stock. So, the herd just gets more efficient. A deep cull in response to huge equity losses would be the appropriate response.
But will this happen during 2024? Guess what, there’s lots of uncertainty in the U.S. hog market as well.
The herd in the EU has been culled heavily. Production has dropped and prices are hovering just below record levels. EU pork exports are declining with the U.S. increasing market share of world pork exports. But in the U.S., production exceeds demand. It’s bearish.
Futures are locked in a downtrend. The market needs a catalyst to change the bearish fundamental situation. Most likely this catalyst would come from China.
Years ago a donation of bellies to Poland changed the whole psychology of the belly and hog market. Currently the funds are holding a large net short position in lean hog futures.
Without a story, without something to change the fundamentals, to change the psychology of the market, the downtrend likely stays in place.
Smith is with Archer Financial Services, Inc. and has been a full service commodity broker specializing in grain and livestock trading for over 25 years. He publishes his widely read evening livestock wire daily and the report is available for a free 30-day trial, simply by emailing him here. Photos courtesy of Getty Images.
