"Bulls make money. Bears make money. Pigs get slaughtered." You have undoubtedly heard this phrase before. Pigs do get slaughtered, but in pork-loving China and other parts of Asia there are not enough to go around. African Swine Flu (ASF) is ravaging the Chinese pig population. Some analysts estimate a reduction in domestic supply of over 50%.
ASF is almost 100% fatal. Sick pigs don't recover. This is a problem - especially in a nation of 1.4 billion pork lovers. Chinese inflation clocked in at 4.5% in November, mostly due to a 97% increase in pork prices. African Swine Flu has also spread to Indonesia, Vietnam and 9 other Asian nations. Recent estimates peg 25% of the globe's pig population being lost to what some are calling "Pig Ebola."
Both bulls and bears in the Lean Hog futures trading on the CME have had to work hard to make money. Hogs have been trading sideways despite the global shortage. The biggest reason for this is the trade war. China is not buying the pigs it needs from the US due to the 72% retaliatory tariffs it imposed on imports. It chose to source pork from Brazil and other South American nations instead.
At the same time, US producers have been increasing production in anticipation of a trade deal that has yet to be signed. The push and pull of bullish expectations of a negotiated reduction in Chinese tariffs versus the lack of Chinese buying is reflected in the sideways market in the chart of June hogs below. We chose the June chart because it corresponds to the grilling season in the US. This is typically the period of highest demand. The August futures contract covers the summer as well and, like June, tends to trade at a premium to other contract months.
Data Source: Reuters/Datastream
Lean hog futures made an all-time high of 1.3360 cents per pound in 2014 due to the outbreak of another hog-killing virus, PED. This virus killed 7.7 million head of hogs in the US. African Swine flu has killed 400 million pigs in China alone, and many more in other parts of Asia. How much longer will the trade issue keep a lid on US hog prices? It depends on the Trump Administration's ability to actually implement a trade deal. The US has the pigs. China needs them. It should be simple - but it hasn't been so far.
With the price of June (and August) hog futures close to the bottom of their 1-year trading ranges, now might be a time to consider long positions. African Swine Flu has made options expensive. This favors bull put spreads and long futures positions protected by "collars." Our upside target is just above the top of the current trading range at 98 cents per pound.
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