Hogs are raised at Old Elm Farms, a fifth generation family farm, on May 05, 2020 near Sycamore, Illinois.
Scott Olson/Getty ImagesTwo different diseases on two different continents are set to leave the world without enough pigs to fulfill the demand for pork and other related meats. That, in turn, should cause a rally in the price of lean hogs over the next few weeks.
“We see demand for lean hogs exceeding supply for the fourth quarter and the first quarter,” says Shawn Hackett, president of Boca Raton–based Hackett Financial Advisors. Hackett sees lean hog futures rallying to at least $0.70 a pound from a recent price of $0.53.
Investors wanting to profit from the likely increase in price should purchase October-dated futures contracts for lean hogs on the CME. Investors wanting to invest via an exchange-traded fund might consider the WisdomTree Lean Hogs (HOGS.UK) which tracks the Bloomberg Lean Hogs Subindex, although the fund is down about 49% so far this year.
A key part of the story is that the Covid-19 related lockdowns have forced factories that process the hogs to slow down their production. That has caused a dramatic drop in demand for hogs.
“Processing plants were backing up because people wouldn’t work in them,” says Sue Martin, CEO and president of Clarion Iowa-based commodity brokerage firm investment firm Ag and Investments Services. The problem was that the Covid-19 virus was spreading quickly via the workers in the plants. Some couldn’t work in the facilities because they were sick, and others wouldn’t come due to fear, she explains.
Because of the processing-plant slowdown, demand for hogs fell and many farmers were forced to euthanize their hog herds. Some also tried reducing the amount of food they fed the pigs to buy time while the processing plants got sorted, Martin says.
Nevertheless, with the processing plants not buying pigs, or at least not as many, the price for lean hog futures contracts got hammered.
On March 10, lean hogs futures contracts fetched $0.793 a pound. By April 16, prices had fallen to $0.432, according to Bloomberg. While the processing plants are now getting back on their feet, there is still likely to be a supply shortfall of hogs over the coming weeks. “Populations of piglets are expected to drop big-time in the fall,” says Hackett.
Meanwhile, China, by far the world’s largest consumer and producer of pork, has its own hog-related problem. The African swine flu devastated pork production in China last year, and the disease has flared up again this year, as well. Last year, China’s swine production fell 21%. This year, it is projected to drop another 15%, according to data from the U.S. Department of Agriculture.
Due to the production drop, China is expected to import 4.4 million metric tons of pork this year, up from 2.5 million tons last year, according to USDA data. In comparison, the U.S. is expected to export 3.4 million tons of pork, while at the same time suffering a shortage of hogs domestically.
“All this extra demand will be met by lower supply from the U.S.,” says Hackett. The result of increased Chinese demand and falling U.S. supplies will be rising hog prices, as any economics student knows.
Not everyone is so optimistic about a rebound in prices. “The really extreme situation is over,” says Dennis Smith, an analyst at Archer Financial Services. “Any price rally will be short-lived.” He also says that a large part of U.S. demand, which comes from areas of the food-service sector such as restaurants, will remain low due to Covid-19-related restrictions. That may make any rally in prices less pronounced.
Still, on balance, savvy investors should take advantage of the likely supply-demand imbalance, and profit from the situation by betting on rising hog prices.
August 20, 2020 at 05:30PM
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Demand for Pork Is Rising. How to Make a Profit on Lean Hogs. - Barron's
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