Pork exports were phenomenal last year, and the U.S. Department of Agriculture has forecast the same for this year. However, the bears are not so easily convinced. They were watching pork prices fall in China (our largest export market).
Chinese meat consumption has increased prompted by rising incomes in urban areas.
China produces about 50 million metric tons of pork each year and accounts for nearly 55 percent of global pig production. To avoid price fluctuations and deal with the growing concern of food safety among consumers, the Chinese government has been encouraging investment in Western-style, large-scale farming since January 2011.
Cofco Ltd., China's largest grain trader, plans to invest 3.5 billion (Chinese yuan or CNY) on breeding and slaughtering facilities that will accommodate 60 million chickens and swine breeding farms in the Southwestern province of Sichuan this year. Cofco set up a joint venture last year with Mitsubishi to invest $1.5 billion CNY on hog, chicken breeding and processing facilities.
The state-owned enterprise, which holds a minority stake in Smithfield Foods, aims to be the largest pig farmer in China and produce 10 million to 15 million hogs per year by 2015, an increase from the current rate of 1.5 million. The company also announced plans to invest more than 20 billion CNY to set up three pig farming bases in Tianjin, Jiangsu and Wuhan, with each expected to produce 3 million pigs annually.
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Yurun, a Chinese meat processor, slaughtered 46.05 million hogs at the end of 2011 and intends to reach 70 million head per year by 2015.
China's top animal feed producer, New Hope Group, said it plans to build more pig farms to expand its annual production by 3 million in the next three years. New Hope's chairman said the company intends to have 70 to 80 percent of the commercial breeding market in the next five to 10 years.
Hog prices have fallen for 12 consecutive weeks. However, recently the Chinese government said it would intervene to stabilize the hog market via rebuilding meat reserves. Upon the news, hog prices rallied to take the highs out of the previous week.
Compared to earlier this year when hog margins were $95 per head profitable, hog operations' profit had fallen on average to $19.70 per head. The March data from the Ministry of Agriculture showed inventories up 5.5 percent from a year ago at this same time. This has translated into strengthening feed demand (note Chinese buying of corn) but also has been the weight on the market. Is supply outstripping demand? The government fears that producers will go out of business and that is the last thing they want. Traders have taken note of this oversupply and fear that U.S. pork exports to China would slow since the government would not want to add to the already large supplies.
Technically, the market is nearing a seasonal time of the year when prices turn positive in May and rally into the first full week of July. The Relative Strength Index indicator on the weekly July contract is low and equal to how low the indicator got last year. My timing indicators are still negative on the daily, weekly and monthly. However, they are entering into a formation that may indicate a bottom is not far away.
Sue Martin of Ag & Investment Services Inc. in Webster City, Iowa, can be reached at (800) 527-0051, e-mail ag_invst@wmtel.net . This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances as an offer to sell or a solicitation to buy or trade any commodities or securities herein named. Futures and optioning involves substantial risk of loss and may not be suitable for everyone.
