Don't Be Fooled by Hog Price Swings: The Future Is ‘Extremely’ Bullish

(Bloomberg) -- Hog traders shouldn’t be fooled by recent price swings. The future looks “extremely” bullish, according to Hightower Report.

The commodity researcher joins a growing numbers of traders and analysts that are predicting a recent uptick in supplies may just be temporary. That’s because African swine fever, a deadly pig disease, is spreading in China and will probably eventually force the world’s largest consumer to tap international markets.

In the meantime, the Asian nation’s slaughter rates have increased as producers cull herds as a disease-fighting tactic. That’s boosting supplies just as U.S. processors are expected to boost production after a bout of freezing weather last week shut or slowed some operations.

Don't Be Fooled by Hog Price Swings: The Future Is ‘Extremely’ Bullish

The contradiction between the short- and long-term market outlook is causing swings in hog futures. The most-active contract in Chicago traded limit up Monday after falling to the lowest in almost six months earlier in the session. Futures for April jumped as much as 5 percent to 63.125 cents a pound before settling at 63.05 cents.

“The situation in China is still a short-term bearish force," said Terry Roggensack, one of the founding principals of the Hightower Report. "But the set up for later this year is extremely bullish."

The U.S. is expected to slaughter more pigs this week, reducing the backlog from last week, when a polar vortex hampered some operations. In China, pork values are dropping as small farmers go out of business and the industry consolidates.

"The Chinese are in the process of liquidating their herd aggressively," said Dennis Smith, a senior livestock analyst and broker with Archer Financial Services. "Currently this has caused a flood of pork in China, but most realize the more breeding stock that’s liquidated, the more amplified the reaction eight to 10 months down the road."

China will buy a record amount of meat from abroad this year because of rising deficits and as consumers change purchasing patterns as a result of African swine fever, according to Fitch Solutions. Inbound pork shipments will reach about 2 million metric tons, close to an all-time high touched in 2016.

"Another item to consider is how cheap current U.S. pork prices are," Smith said. "The Chinese won’t wait until they run very short on pork -- they’ll start booking cheap pork now. The government has already stated they’ll soon be buying pork for their reserve."

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