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Hog herd growth spurs upgrade to soy price hopes

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Standard Chartered lifted its forecast for soybean prices to above the futures curve, citing strong demand from pork producers – both in the US and in China, where reviving margins are sparking herd rebuilding.

The comments came ahead of the announcement on Wednesday by the US Department of Agriculture, through its daily reporting system, of the sale of 1.93m tonnes of US soybeans to China, plus a further 182,000 tonnes to an unknown destination.

The bank recommended investors buy Chicago's September 2014 soybean contract, trading on Wednesday at $12.21 ¾ a bushel, foreseeing it rising to $13.50 a bushel, spurred by tightness injected both by a disappointing US harvest and resilient demand.

Indeed, the bank said it questioned "the rationale" behind a US Department of Agriculture downgrade last week by 35m bushels to its forecasts for the US soybean crush and exports in 2013-14, given hog sector dynamics.

"As we enter the fourth quarter of 2013, the market should receive support from the tightening balance sheet in the US and improving demand from China," StanChart analyst Abah Ofon said.

'Strongly bullish'

In the US, StanChart flagged the appetite to expand the pig herd which has driven hedge funds to take their most bullish position ever on Chicago lean hog futures and options, holding a record net long position as of last Tuesday.

"Investor sentiment towards hogs is strongly bullish," Mr Ofon said, noting industry reports "that producers are enjoying positive margins for the first time in about a year".

Margins are being helped by, besides a retreat in grain prices, decent pork exports.

While down 5% year on year in the first seven months of 2013 to 1.23m tonnes, this includes a mainly accounted for by a slump in shipments to Russia, which has imposed curbs on pork obtained from hogs finished using the ractopamine growth promoter.

"We expect strong US pork exports," Mr Ofon said, flagging China as a "core market, as its improving domestic demand provides momentum to the global supply chain".

Chinese dynamics

Indeed, Chinese pork imports rose 30% year on year to 51,000 tonnes in July, and should maintain growth through 2013 given seasonal patterns and pork prices which are at their highest since April last year.

This rise in prices is encouraging domestic production too, boosting the important hog-to-feed ratio, and driving a sustained increase in the Chinese herd, by far the world's biggest, to 473m head this month, up 1.3% from August.

The quest for soymeal, the high protein feed produced from soybeans, has lifted profits for soy processors, and could continue to "improve crush margins for processors in China, in turn pulling soybean prices higher" and improving the appetite for imports.

Corn vs soybeans

The support for soybean prices contrasts with a soft week for Chicago futures, which on Wednesday set course for a fourth successive negative close.

This has left them underperforming corn, reducing the November soybean futures: December corn futures ratio to 2.95:1 from a historically high level of 3.01:1 reached last week.

Indeed, some brokers, such as Morgan Stanley and Societe Generale, have flagged the potential for corn futures to outperform soybeans, given the extent of risk premium investors have already built into prices of the oilseed.

The forecast of growth in demand from US hog producers comes against a backdrop of a slump in US slaughter rates which last week fell to 2.172m head, down 10.5% year on year.

Analysts have said it is unclear yet whether this reduction is down to one-off effects, such as hot August which may have slowed the growth of hogs to slaughter weight, or to effects such as a decrease in use of ractopamine, or potentially to greater herd losses from PECDv porcine diahorrea virus than had been thought.

"Eventually, slaughter weights will tell us if producers are falling behind on marketings or if the weekly slaughter decline points to a true shortage of hogs on the ground," a report from Paragon Economics and Steiner Consulting said.


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