Pork Catches the Flu

By Julian Murdoch

Let's put one thing right out there: Even though the current flu that is threatening to become a pandemic is currently called the swine flu (aka H1N1 flu), there is no evidence of pig-to-human transmission at this time. The pork industry, as you'd expect, has released multiple missives saying that there is no risk of infection from eating pork or pork products.

But just because that's the science doesn't mean markets or governments care. A number of countries have already banned imports of pork and pork products from the U.S. and Mexico - Russia, China, Ecuador, Ukraine and Ghana just to name a few. In what might be the most obvious case of swine hysteria, Egypt has gone one step further and decided to slaughter all the pigs in the country - roughly 250,000 to 400,000 pigs - even though there hasn't been a single case of swine flu in Egypt.

Markets move on information and emotion, and right now there is a lot of information (and it must be said, misinformation) in the media about swine flu. And while people may not be panicking yet in the U.S., the market is not serene.

Since news of the H1N1 flu strain broke in Mexico on April 22, the price of lean hogs (May contract) has dropped from 70.65 to yesterday's close of 60.45 - a 14.4% decrease.

This may not look like much, but this is April. April has been a big month for the lean hog contracts. Lean hog (LH, CME) prices have trended up in every April since 2003. The last time prices in April closed lower than they started was in 2002, when the entire year had a downward trend. Historically, lean hog prices tend to be highest May through July, because the number of market hogs (or pigs of slaughtering weight) is the lowest and meat distributors are beginning to stock up for the winter.

The good news is that beyond the immediate panic, things don't look so terrible. The June Lean Hog contract closed up yesterday (0.45 to 66.750), signaling that the market may be responding to all of the efforts by the pork industry, CDC and USDA to offset the unfortunate "swine" tie-in. In fact, other than the May contract, all of the lean hogs futures were up at yesterday's close:

It's also quite likely we're seeing folks selling the near-month while rolling their long positions forward, and nobody wanting to actually hold these things for May delivery in this environment, depressing the contract price.

As you'd expect, the actual stocks of the companies making a living with pigs took a big hit as well:

Tyson (NYSE: TSN), Hormel (NYSE: HRL) and Smithfield (NYSE: SFD) all took a beating on Monday - with Smithfield suffering around a 12% drop in stock price. Smithfield has a major pig farm and processing operation in Mexico, and though it claims, loudly, that it is not the source of the flu, it hasn't been able to recover as well as Hormel, which is back even.

Beyond the immediate, gut reaction in pork-related stocks and commodities, people began speculating about other future ramifications.

Imports And Exports

Global meat imports/exports were already forecast to drop in 2009 due to the current economic crisis, a stronger U.S. dollar and restrictive trade policies, according to the USDA's Livestock and Poultry: World Markets and Trade Report, released on April 16. For pork, the main drivers of the forecasted 13% drop come from greater Chinese pork production (decreasing their need for imports) and high out-of-quota Russian tariff rates. Ukraine also had very high imports in 2008, and is expected to reduce imports for 2009.

If the import bans stay in place - how much worse would it be here at home?

In 2008, the U.S. was responsible for 39% of world pork exports, serving 80 countries throughout the world. According to the USDA, here's how that broke down:

Japan	28.36%
Mexico	14.44%
Hong Kong	10.49%
Russia	9.21%
Canada	9.05%
China	7.75%
South Korea	6.36%
Other	14.35%

With Russia and China receiving 16.96% of U.S. exports (not counting the 10% that Hong Kong receives) and currently enforcing bans on U.S. pork products, we'd expect to see the price of pork in the short term continue to drop. If the bans continue, pork prices will continue to be negatively affected and we'll continue to see low prices. Eventually, if the situation continues long enough (we're talking close to a year or more) the herd size will most likely be reduced, and we could see stabilization.

Swine Flu And Feed Grain Prices?

One might think that if consumers stop eating pork - or significantly reduce their consumption - they might switch to another protein source, like beef. If that happened, common sense would say that feed prices might actually go up, because cows require a different feedstock that is heavier in corn and soybeans, and are just less efficient at turning that grain into grocery store steaks. But according to meat industry analysts the CME Group spoke to for their Commodity News for Tomorrow on April 28, it wouldn't work that way - at least not for a year or more.

"A sustained adjustment in consumers' purchases of proteins would be required for a noticeable change in feed grain demand to occur. Should there be a decline in pork consumption, the chicken industry could react the quickest and begin ramping up production, but that would not become available in the stores until about six months."

"The life and reproductive cycles of meat and dairy animals don't allow for quick changes in feed use, and it could take a year or more for any noticeable adjustments in usage to occur, according to analysts and industry participants."

Of course, since swine flu does not come from eating pork or pork products, we'd hope for a universal slapping of foreheads and muttering of "what were we thinking?" with these countries revoking the bans. But on the other hand, those governments may be using the bans as a way of fixing their trade imbalances while also garnering some public good will. In politics, making people feel like their government is doing something - anything - in a crisis, is often more important than just doing the right thing.

Like washing your hands, and covering your mouth when you cough.

Comments

[doubleguns:]

When they start to go hungry they might wish they had that pork and then they might have a different opinion of thier govt.

A true pandemic could lead to some real shortages in the food industry if the producers/processors/t... folks die off but on the other hand if its the consumers croaking we could have a surplus.

The actual outcome could be interesting. Kinda like our present market. Seems to be a never ending story.

May 01 07:43 AM

[User 405685:]

Interesting stuff! This blog has up to date Swine Flu News

May 01 01:07 PM

[LKofScotland:]

yes, i agree. our governments are targeting the real "swine" in this picture. your pork producers will be purloined, America. prepare for the onslaught.

May 01 07:09 PM