The peak season of demand for animal proteins in the United States started on the Memorial Day weekend at the end of May. In June, July, and August, the aroma of beef, chicken, and pork will fill the summer air as the barbecue is a part of being an American.
As carnivores from coast to coast and the Canadian to the Mexican border fire up their grills, the price of cattle and hog futures have been moving lower. With both beef and pork prices falling, consumption is bound to rise.
Meanwhile, when it comes to the price of pork, the lower prices since April may turn out to be a temporary phenomenon, and that is why I am stocking up and filling my freezer with the meat these days. The outbreak of African swine fever (ASF), or what some are calling “pig Ebola,” is spreading from China, where it started, to Vietnam. Many pigs are dying in the epidemic that threatens to spread even further over the coming months. When it comes to agricultural products like meats, nothing can impact the price like the outbreak of disease. Mad cow disease before the turn of this century sent the price of beef to lows as consumers turned to other sources of protein. More recently, an outbreak of PED virus that killed over seven million suckling pigs in the US sent the price of pork to an all-time high in the futures market. Time will tell what ASF may do to the price of pork over the coming months.
The most direct route for exposure to cattle or hog prices is via the futures market on the Chicago Mercantile Exchange. For those who do not venture into the highly-leveraged and volatile world of the futures arena, the Invesco DB Agricultural Fund (DBA) holds cattle and hog futures as part of its portfolio. The most recent holdings of DBA show that the ETF had a 10.69% exposure to nearby live cattle and lean hog futures contracts.
Cattle fall from the 2019 highs
The price of nearby cattle futures hit a high for 2019 at $1.3045 per ounce during the weeks of February 25 and March 18. The double-top formation on the weekly chart was the sign of an impending decline in the price of beef.
As the weekly chart highlights, the price of nearby live cattle futures fell to their most recent low at $1.0650 per pound last week, a decline of 18.4% from the highs. In a sign that live cattle could be close to a bottom, price momentum and relative strength indicators have dropped into oversold territory. At the same time, the total number of open long and short positions in the live cattle futures market fell from 450,212 contracts during the week of April 15, to 359,965 contracts on June 11, or 20% lower. Falling price and declining open interest is typically not a technical validation of a continuation of a bearish trend in a futures market.
During the week of February 25, when live cattle futures were on the high, the cash-settled feeder cattle futures contract was at a high at $1.44 per pound. Feeder cattle were at $1.35300 on June 12, 6% lower, but the feeder cattle have been declining since early October 2018 when the price stopped just short of the $1.60 per pound level.
Hogs rallied on African Swine Fever but have come off the peak
The weekly chart shows that reports of African swine fever in China that killed off a significant percentage of the hog population took the price to a high at 93.025 cents per pound during the week of May 20. Since then, hog prices have declined for three consecutive weeks, reaching a low at 78.275 cents at the end of last week, a drop of 18.8%. Price momentum and relative strength metrics are falling, but they are only in neutral territory. At the same time, open interest exploded to the upside rising from 244,874 contracts during the week of February 19 when the price was on the low to 312,249 contracts on June 11, a rise of 27.5%. Rising price and increasing open interest tend to be a technical validation of a bullish trend in a futures market.
Hog prices moved higher on supply fears over the outbreak of African swine fever.
Trade weighs on prices
One of the issues that have weighed on the prices of beef and pork over recent weeks has been the escalation in the trade dispute between the US and China. On May 10, after becoming frustrated over the pace of negotiations and Chinese backtracking on promises, US President Trump upped the ante by increasing tariffs to 25% on Chinese exports to the US. China retaliated on May 13, which sent fears of a global economic slowdown rippling through markets across all asset classes. The trade war between the nations with the two leading GDPs in the world has hit the Chinese economy worse than the US. However, since the US is a significant producer and exporter of agricultural products, the tariffs have weighed on meat prices as well as grains and other commodities that come from the US.
Meanwhile, when it comes to animal proteins, the outbreak of the disease in China is spreading, and it may not be long before they need to put the dispute aside to feed their people.
Some are calling AFS “pig Ebola” – and it is spreading
The first signs of the African swine fever came last August, and since then, around 22% of China’s pig herd has died from the disease. According to the latest reports from the World Organization for Animal Health or OIE, African swine fever has spread to neighboring countries including, Mongolia, Russia, Cambodia, and Vietnam. There is no treatment or vaccine for the disease, and a large percentage of China’s roughly 440 million pigs could be at risk. So far, China has culled 1.2 million pigs according to official government claims. Meanwhile, Vietnam culled 2 million from a total population of 30 million pigs.
Christine McCracken, an animal protein expert at Rabobank, recently said that by the end of 2019, China could lose as many as 200 million pigs to the disease. Some experts are calling African swine fever the most significant animal disease outbreak ever seen on the planet, more prominent than both foot and mouth disease and BSE, which is mad cow disease. According to the US Department of Agriculture, there is no sign of the disease in the United States. The price of Chinese pork has not exploded to the upside because of the vast inventories of frozen metal. However, as those stockpiles drop, the world’s leading pork consuming nation will have to look elsewhere to meet requirements for a population of 1.4 billion people.
The higher the death toll from AFS in Asia, the more valuable US production is likely to become if US hogs do not become infected. If the price of pork were to explode to the upside on a global shortage, beef prices would likely follow as the price differentials could cause cattle demand to risk on pork shortages. There are already signs that hogs are becoming historically expensive compared to cattle. The median level of the live cattle divided by lean hog spread dating back to 1976 is around 1.4 pounds of pork value in each pound of beef value. The median has been rising as beef demand has increased over the past four decades, which is a sign of increasing global population rather than the percentage of beef carnivores on the planet.
The daily chart of the spread in August futures contracts shows that at 1.2765:1, pork is currently historically expensive compared to the price of beef.
While nearby July hog futures prices were at around the 84.125 cents per pound level on June 12, the August futures contract was lower at 82.175 cents. The backwardation or lower deferred price is a sign of tightness in the hog futures market when it comes to supplies.
DBA holds beef and pork futures
The most direct route for participation in the cattle or hog markets is via the futures provided by the Chicago Mercantile Exchange. The Invesco DB Agricultural Fund holds more than a 10% exposure to beef and pork prices. The most recent top holdings of DBA include:
Source: Yahoo Finance
With a 10.69% exposure to the two meats, DBA has net assets of $432.18 million and trades an average of 355,956 shares each day. The ETF charges an expense ratio of 0.85%.
Cattle and hog prices have been falling even though it is the peak season for demand in the United States. A continuation of the spread of AFS which many are calling Pig-Ebola could cause lots of volatility in the cattle and hog futures arena over the coming weeks and months.
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