A deadly and extremely contagious virus is threatening China’s hog producers. African swine fever (ASF) has been found in pigs transported from Northern to Southern China. ASF has the potential to kill every single hog it infects. There is no vaccine for ASF, so failure to stem the disease could have far-reaching ramifications. While not a full-blown epidemic yet, the disease is spreading. China has culled roughly 25,000 pigs in areas near the most recent outbreaks and likely will expand these operations.
With 433 million hogs out of a global population of 773 million, China is responsible for over 50% of worldwide supply. This makes sense because China is far and away the world’s largest consumer of pork. The last outbreak of a porcine virus to hit the Chinese hog market occurred in 2006. Known as “Blue Ear Disease” this virus was responsible for the deaths of millions of pigs – causing prices to quadruple in a very short span of time.
The most recent example of a virus which affected the global hog market was porcine epidemic diarrhea, or PED for short. It hit the US hog market, killing over 8 million pigs in 2013/2014. PED caused the price of lean hog futures to soar as high as $1.33 per pound in the summer of 2014. The spread of ASF in China could have similar effects.
The hog market follows a fairly reliable pattern. Prices tend to rise during the spring and early summer in anticipation of the mid-summer grilling season. They fall in autumn and early winter, then repeat the same cycle in late-winter early-spring. China’s announcement of retaliatory tariffs in the thick of this summer’s grilling season moved the classic autumn decline forward a month or so. Its announcement that this year’s hog crop has been affected by ASF appears to have shifted the hog’s seasonal recovery forward as well.
Growing affluence in pork-loving China means Chinese demand is even higher than during the PED outbreak in 2013/2014. The Chinese company WH LTD bought US Company Smithfield Foods for $4.2 billion in May 2013 – it gave the Middle Kingdom a big foothold in the American pork market.
It would not surprise us to see China drop its tariffs on American hogs should ASF spread throughout China. China could also remove its tariffs without the spread of ASF as part of a deal with the US.
Data Source: Reuters
No matter the reason, a removal of Chinese tariffs could cause the prices of hog futures to soar. While we are not necessarily forecasting a return of the $1.33 per pound levels of 2014, we would not be surprised to see hogs rally back to 90 cents per pound this spring. This marks the top end of the trading range that has dominated CME hog futures since the beginning of 2013.
What to Do Now
RMB Group trading customers may want to consider buying April 2019 80 cent / 90 cent bull call spreads. Look for the April 2019 hog futures to test the top end of their 3-year trading range prior to option expiration on April 12, 2019. Pay no more than $700 per spread. If filled at $700, your maximum risk is $700 plus transaction costs. This spread has the potential to be worth as much as $4,000 should April lean hog futures hit our 90 cents per pound objective on or prior to option expiration.
Please be advised that you need a futures account to trade lean hog futures and options. The RMB Group has been helping its clientele trade futures and options since 1984 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) to for more information and/or to open a trading account. You can also visit our website at www.rmbgroup.com.