Market Preview: Are China's Losses Driving Futures Prices?

US - Weekly U.S. Market Preview w/e 13th July, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 14 July 2007
clock icon 4 minute read

Chicago Mercantile Exchange (CME) Lean Hogs futures prices surged upward on Thursday buoyed by rumors that China was shopping for pork in the United States. The rumors were not confirmed, but traders took August futures up the daily limit of $3.00 to close at $74.075, its highest level since June 19.

The limit move broke several key technical resistance items, including a former support line at $71.80 and the 50-day moving average at $73.18. Though not up the daily limit, the other deferred CME Lean Hogs contracts also broke through key technical resistance.

This could well be a wonderful opportunity for pork producers who failed to price hogs during earlier rallies. While it would be nice for October and December to hit new highs, waiting that long may not be prudent. October is back above $68.50 and December ended the day at $67.00. Those prices are clearly back in the black, given the recent decline in corn prices.

Back to China, I don't know whether to believe the rumors or not. We do know that China's pig industry has been hit hard by "fever disease" or "blue ear" or a new strain of porcine reproductive respiratory syndrome or something. Earlier reports had indicated 20 million pigs had died. That would be devastating here, but that's only about 5% of China's herd. Saying "only" is not intended to minimize the importance of such a loss, if it has occurred. Rather, it's an effort to keep the loss in the perspective of China's enormous pork industry.

I have been thinking that something must be brewing on the chicken export front, given what has happened to leg quarter prices. Figure 1 shows the rally of these prices to record high levels in recent weeks. That has occurred as chicken production has increased by 2.4%, 3.1% and 4.5%, respectively, for the past three weeks. Inventories of chicken legs and leg quarters on May 31 (the last data available) were at 59% and 74%, respectively, of year-ago levels, so this product is moving somewhere and that usually means exports.

Export data, of course, runs two months in arrears, so all we know at present is that chicken exports through April were down 4.6%. May data will be released on Friday.

Weaned Pig Price Slippage

Another reason that I am urging producers to look at pricing opportunities on this rally in Lean Hogs futures is what has been happening in the weaned pig and feeder pig markets. Figure 2 shows spot prices and weighted average prices (includes pigs sold under contracts) for weaned pigs and 40-lb. feeders. Note that the weaned pig spot price reported by USDA reached a low for the life of this USDA report at $24.57/head the week of June 15, and that low twice was broken again with last week's price plunging below $20/head. The decline in 40-lb. pig prices is nearly as dramatic though they have not reached a low for the life of this USDA report -- at least not yet.

Declining weaned pig and feeder pig prices are nothing new for June and July as the normal seasonal low occurs in August. But this decline is larger and faster than normal and has occurred as cash and futures prices for corn have fallen -- a change that should have bolstered weaned pig and feeder pig prices. Pig numbers in the USDA reports have not been large by historical standards, but it could be that there are larger numbers of unreported pigs. There's no good way to know that except by seeing what the reported prices are doing.

Extremely low pig prices tell me that there were plenty of pigs farrowed from mid-May through late June. If that is so, slaughter in mid-November through December could be higher than anticipated.

It all fits with my concerns about larger supplies due to effective and available circovirus vaccines. Whether demand from China, or wherever, is strong enough to overcome larger numbers remains to be seen.

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