Last year the market made some big gains and big losses on speculation about pork sales to China. Today Tyson Foods, the nation's second largest pork packer, announced they were in talks with China to supply them with pork. No timetable was released for neither when exports will begin nor were any amounts of potential exports given. The CME rallied on this news Monday.
We may need a little History lesson on Pork to China. Since late 2006 we had been hearing of production problems in China due to Blue Ear Disease, a variant of PRRS, which the US has had around since 2000 to 2002. Chinese pork prices started to rally throughout 2007 as production problems and food inflation hit their country and they are still high. Pork prices are currently 60% above the same level in early 2007. As a side note we cannot say any Chinese production or pricing data is accurate to any degree. The story hit a climax in summer of 2007, when speculation about potentially massive pork sales to China was talked about. On July 13, 2007 Smithfield, the nations largest pork packer, announced they were in talks with China to sell "paylean" (a growth and leanness additive many US producers use) free pork. No amounts or timetable were given. Tyson, the nation's second largest pork packer, also confirmed they were in talks as well. On August 24, 2007 Smithfield announced they had made a sale of 60 million lbs of pork to China, which would be exported between September and December. That equates to 15 million lbs per month.
The day before Smithfield's original announcement the October contract rallied $2.92 and closed at $68.55. That was due on speculation of an impending announcement. The day of the announcement of talks, on July 13, the October lean hog contract closed at $68.72. A rally started, which culminated in a in a peak of $77.70 on August 3. Prices then fell to post a short-term bottom on August 16 at $65.67. On the day of Smithfield's 60 million lb confirmation it closed at $70.65. We will note nothing but lower trade was seen after that announcement for the remainder of the contract. Making it simple that from the day of announced talks the market rallied for 21 calendar days, not trading days, for $8.97. Then it sold off for 13 days for -$12.02. An eighth day comeback from those lows was seen to the confirmation sale announcement of $4.97. Making it even simpler, from the day of announced talks to the actual confirmation it took 42 days and rallied only $1.92. Allendale will monitor this situation in the coming days to see how it develops.
A separate issue from the China news is whether or not the US pork industry has started, and how deeply it is involved in, liquidation. Large supplies, low hog prices, and high costs (feed) have guaranteed US producers will liquidate some of their breeding herd. There are measurements of gilt slaughter, which we have not found accurate, and USDA data on sow slaughter. Sow slaughter has been up and down since October when the extra hogs started showing up. Contrary to widely SPECULATED sow slaughter guesses, the ACTUAL sow slaughter totals do not show consistent liquidation. The four-week average (through January 12) shows sow slaughter DOWN 1.1%. The eight-week average (through January 12) is up 1.9%. January 12th is the latest actual data available. Contrary to the talk there is no consistent liquidation yet.
Short Term Pricing: We would look for the market to make a knee jerk reaction higher here. This time it may be a shorter and smaller than the summer 2007 reaction. The reason is because last year the US industry had very high hopes and they fell very short of getting realized. We will not discount the pork to China export situation. They were our number six buyer two years ago and moved up to number three last year. We estimate they will be number two this year. We can let this market run up a little to get some hedge sales filled. So far April futures are staying in their planned sideways trade. Let's see if it stays in there with this China hype back in. On the speculative side we still like selling April calls and puts. If the April closes above $64 resistance then getting out of short calls and staying with short puts would be the approach to go with.
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