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"The idea would be to purchase hog call options on the CME in order to take advantage of the likely hike in U.S. hog values once the flow of Canadian hogs has slowed or stopped when the implementation of the duties take effect," a trade source said.

However, while the plan would work in a perfect world, industry and brokerage sources expressed a number of concerns.

"The likelihood of U.S. hog prices heading higher would be a fairly safe assumption, and by purchasing a hog call option on the CME, it would help to offset any loss in Canada's domestic value for hogs because of the extra supply," said Jerry Johnson, a Lethbridge, Alberta-based broker with Benson Quinn-GMS. However, he also cautioned that while the idea looks good on paper, there were a number of risks involved.

"You will need to be sure of the timing," he said. "You don't want to purchase that hog call option too early given the fact producers may want to increase their marketings to the U.S. ahead of the actual duty implementation."

Johnson said the extra movement of hogs to the U.S. would work against the call option idea at that point.

Tyler Fulton, director of risk management at Manitoba Pork, agreed the purchase of a hog call option would counter the bearish impact a countervailing or antidumping duty would have on Canada's live hogs on paper.

"The duty placement would have to have a fairly supportive influence on the CME live hog futures market in order to work," he said. However, he doubted whether this would be the case.

"I actually don't think the countervail will significantly alter the flow of hogs from Canada to the U.S., which consequently will result in little impact on either the U.S. cash hog or futures market," Fulton said.

He agreed that packers in Canada were likely to lower the value of pigs being purchased if there was indeed a build-up of available hogs.

"However, if the price being offered by Canadian packers is too low, what you are likely to see is the producers who are shipping hogs to the U.S. willing to take their chances," Fulton said. "These producers are risk takers and would rather pay the $5 duty per hog on the idea that they will have at least a chance to recover that lost value rather than accepting a lower value from the domestic processor."

Fulton said these producers stand a better chance of getting that value back in challenge either via the North American Free Trade Agreement or the World Trade Organization.

"Even after Nafta and WTO appeals are exhausted and there is still no reversal of the duty, there is still a review option under terms of Nafta which Canadian producers can launch," Fulton said.

Under this review, a panel is established to determine whether the U.S. countervailing or antidumping duty rate was appropriate for that particular year. If the rate of duty was too high, then the excess will be returned to the Canadian producer. On the flip side, if the review finds that the rate was too low, then Canadian producers would have to cover the shortfall.

"If these producers were to deliver to the low price in Canada, and if they accept this price, they have absolutely no chance of getting that value back," Fulton said, "So if it's a choice between somewhat comparable prices they will continue to ship their hogs south of the border."

Both Johnson and Fulton said there would need to be a positive benefit to the CME live hog futures market in order for the cash call option idea to work. However, because of the variables along with the number of factors that could play a significant role in the determination of the price, the strategy was deemed pretty risky.

Another factor that would make the purchase of a CME hog call option a risky proposition is ever changing exchange rate between the Canadian and U.S. dollar, Johnson said.

Industry sources also pointed out that hog options, relative to other commodities in the U.S., are thinly traded and because there is a relatively few number of parties involved in the trade of those futures, producers were also at a risk of paying too much for the hog call option.

The source said the risk combined with all the different factors that may influence the futures market would work against the benefit of using a call option at least in this instance.

"I also have a hard time believing that the reaction to the implementation of any countervail or antidumping duty will be as transparent and decisive as one might think," the source said.

On May 7, the U.S. International Trade Commission found reasonable evidence that the U.S. hog industry was materially injured by Canadian live hog shipments that are allegedly subsidized and sold in the U.S. at less than fair value. All six ITC commissioners voted in the affirmative.

As a result, the U.S. Department of Commerce will continue to conduct its antidumping and countervailing duty investigations of imports of live swine from Canada, with its preliminary countervailing duty determination due on or about May 31 and its preliminary antidumping determination due on or about Aug. 12.

Source: eFeedLink - 19th May 2004