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Will Chinese demand maintain the lean hog price recovery in 2020?

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Lean hog futures gained 17.1% in 2019, almost exactly recovering losses of 2018, thanks to a revival on hopes for a China-US trade deal.

 

With China’s own pork output slashed by the impact of African swine fever, but demand seen as resilient, the country’s imports have soared, reaching 1.73m tonnes for the first 11 months of 2019, up 58% year on year.

 

The November figure, at 229,707 tonnes, was up more than 150% year on year, according to Chinese customs data.

 

The US’s exposure to this demand is seen being enhanced by a trade agreement.

 

However, the country’s pork output is growing too. Which dynamic will win out in 2020? Observers give their view on the market outlook.

 

 

Chip Whalen, Commodity & Ingredient Hedging

Months of uncertainty with escalating confrontation between the United States and China has given way to a first phase trade agreement that could lead to significant increases in pork shipments among other agricultural commodities.

 

It is also important to keep in mind the supply situation and its impact on price. The current projection for 2020 US pork production is 28.694bn pounds, an increase of 3.6% over [2019].

 

The supply side of the market will definitely be a big influence over price in the coming year, even though the focus will obviously be on demand.

 

In terms of demand, the US Department of Agriculture is currently forecasting a 12.8% increase in exports for the coming year, with 804m pounds of additional pork being shipped during 2020 compared to 2019.

 

This forecast was also made with the assumption that existing tariffs would remain in place. Given expectations for China to remove tariffs on US pork, some estimates are now as high as a 1.5bn-pound increase in exports, and that will likely be needed if prices are going to move significantly higher in the new year.

 

With the price recovery we have seen over the past month in the hog market, option implied volatility has come down although it remains very high from a historical perspective.

 

 

Goldman Sachs

Global protein markets are experiencing a sharp fall in supply, driven by African swine fever (ASF) and drought-stricken Australian cattle.

 

For 2020, global pork production is projected to be down 16%, driven by China, and a still spreading ASF in Asia, and with limited growth in US and European production.

 

The pass through to US prices will remain conditional on export demand, which… has so far not been sufficient to offset a 6% year-on-year increase in US pork production.

 

US exports would likely increase after a partial first trade deal, leading to tightening US inventories and higher prices, an outcome we are positioned for with our long lean hog margin trade recommendation.

 

 

Rabobank

Another year of record US hog slaughter, up 3.9% year on year, is expected in 2020, driven by modest improvements in productivity and herd growth.

 

Low cyclical disease pressure will continue to boost yields and remain supportive to production.

 

Strong packer returns should continue to fuel lean hog markets, driven by record export demand and good domestic takeaway. Improved trade relations with key markets should boost exports in 2020 – leaving 5% less pork available on the US market.

 

The recently signed US-Japan trade agreement and expected ratification of the USMCA will help boost US export growth.

 

US pork shipments to China will be record-large, up 16% year on year, in 2020, as the full impact of ASF is recognized by the market.

 

We expect stronger prices in the first half of 2020, as Chinese orders for the lunar new year are booked and as competing protein availability declines.

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