Will Chinese Demand or Soaring Feed Costs be the next “Black Swan” Event for Hog Values?

by Moe Agostino

Early 2021 witnessed a “perfect storm” brewing in the U.S. hog industry as a marketing whole (less supplies in 2021 at -3.4% vs. last year) due to higher diseases (PRRS/PEDV in Iowa/Minnesota), strong global demand (driven by China) and domestic demand (driven by U.S. stimulus cheques in 2020/21) , higher feed costs, and the pent-up pandemic-recovery demand has resulted in soaring U.S. pork cutout values and futures, which are higher year-on-year (Y/Y) by +90% and +56%, respectively. In fact, never has there been a time (including the record hog-price-year- 2014) when May hog futures were trading at a $6.00/cwt premium to July futures, with seasonality just starting up (lower supplies by July). This is a real bull market for meat demand!

Managing inputs will be critical as tight global and U.S. corn/soybean balance sheets (with very little supply side cushion) have no margin for errors.

China’s GDP soared by 18.3% in Q1-2021 and the U.S. GDP is not that far behind at +10%. The post-COVID-19 recovery of pent-up demand could provide an upside surprise! China imported 1.02 mmt of meat in March, the highest since January of 2020. If U.S. hog exports remain steady at 40,000 tons per week by the end of 2021, exports will exceed last year’s record levels by 4.3%!

The key drivers for higher hog prices will continue to be demand and strong U.S. pork cutout values (as lower U.S. supplies are here to stay- USDA lowered U.S. 2021 hog production by 400 million head). It also looks like there is a short squeeze in bacon supplies. According to IRI Integrated Fresh data, U.S. bacon sales in January of 2021 were higher Y/Y by about 23%, with dollar value of sales that month being about U.S. $490 million. That momentum has continued so far in 2021.

China’s Q1-2021 pork production rose by 31.9% Y/Y to 13.68 mmt, the highest quarterly volume in 2 years. The surge comes after huge investments were made in rebuilding China’s hog herd since African Swine Fever (ASF) hit 2 years ago, but continued reports of ASF resurgence in the North suggest the recovery maybe only be back to 60-65%, and not 80-90%. China could still be a large importer in 2021, but imports could also fall.

Managing inputs will be critical as tight global and U.S. corn/soybean balance sheets (with very little supply side cushion) have no margin for errors. A pending drought for the Brazilian 2nd Safrinha corn crop and U.S. summer growing season could see a bullish 1-year story turn into 2 or 3 years for grain futures. However, if feed costs stay high, Chinese demand falls and producers expand (thanks to higher profits), it could be a triple “Black Swan” long-term. History could repeat itself, at the highs in July of 2014, hog producers should have locked in margins as far out as they could! Similarly, in May, June, and July of 2021, producers may need to lock in margins as far out as October/December of 2022.

Monthly nearby Lean Hogs (CME)

Moe Agostino
Maurizio ("Moe") is Chief Commodity Strategist with Farms.com Risk Management