Roaring demand for pigs in China fires up rally in Chicago hog futures market

PUBLISHED : Tuesday, 14 June, 2016, 2:58am
UPDATED : Tuesday, 14 June, 2016, 9:02am

In the US, foodies call it nose-to-tail eating. In China, it’s just called dinner.

A robust appetite for cuts like pig feet, ears and snouts in the world’s biggest pork-consuming nation is fueling a rally for hogs in Chicago. Investors last week increased their bets on a hog rally by the most since January, and the number of contracts outstanding has jumped to the highest in two years.

Inflated corn costs in China forced the country’s farmers to cull herds and shrink pork output, spurring demand for more imports. The nation could buy as much as 5 per cent of US production this year, according to Dermot Hayes, an agricultural economist at Iowa State University in Ames, Iowa. Hog futures are trading near the highest since 2014, the year prices reached a record because of a piglet-killing disease.

“If you have a specific product that China as a culture eats and has demand for, that adds value,” Randy Spronk, president and co-owner of hog producer Spronk Brothers III, said in an interview last week at the World Pork Expo in Des Moines, Iowa. “Looking forward, if they shrink the sow herd or increase per-capita consumption, the potential that’s there is phenomenal.”

The net-long position in hog futures and options jumped 20 per cent to 57,205 contracts in the week ended June 7, according to Commodity Futures and Trading Commission data released three days later. Hog futures for August settlement touched 87.975 cents, the highest for a most-active contract since December 2014 and a record for the August contract. Open interest for futures reached a two-year high last week.

The Asian country has a culture that’s embraced eating the whole animal for generations. That’s a boon for US livestock producers, because meat that Americans would sometimes rather toss has a home across the ocean. Pork exports to mainland China, including variety meats, surged 117 per cent in 2016 through April versus a year earlier, according to the latest government statistics compiled by the US Meat Export Federation.

Bets that this is just the beginning of China’s need for foreign pork is spurring US producers to adapt their farming techniques. The Asian nation has a ban on ractopamine, a feed additive that makes hogs gain muscle faster while eating less grain. To better compete with European farmers, who don’t use the drug, American producers including Spronk are switching.

“We’re creating more demand by having pork to export to China,” Spronk said. His Edgerton, Minnesota-based company markets about 200,000 hogs a year and stopped using ractopamine in October. Meatpackers are paying him a premium for his hogs, he said.

In the US, the variety cuts of pork are sold at a discount. Feet, for example, fetched about 99.6 cents a pound on June 10, government data show. That compares with as much as US$2.95 for tenderloin. In China on the same day, fresh feet could be found at retail for 46 yuan a kilogram ($3.17 a pound) in Fuzhou, while pig snouts in Guangdong were 20 yuan ($1.38 a pound).

Snouts in the US were selling for about 58 cents a pound in the week ended June 4. The premiums in Asia are an incentive for American producers.

China could be slow to increase its domestic production. The government is cracking down on violations of environmental regulations, and hog production is shifting from backyard producers to modernised plants located away from urbanised areas, which will take time, said Iowa State’s Hayes. Until then, US exports of variety meats to the country could help add as much as $13.50 a head to hog prices in the next few years, he said. Currently, they’re adding about $10.80 a head for a 270-pound animal.

Still, an expanding US hog herd means that supplies could increase fast enough to meet demand, tempering price gains. With new slaughtering plants coming online, exports will have to absorb much of the rising output, said Becca Nepple, vice president of international marketing for the Des Moines, Iowa-based National Pork Board.

It’s not just US farmers that have an eye on Chinese markets. Producers are in fierce competition with Europe, Brazil and Canada, which can limit increases for hog futures.

“Europe has gained substantial amounts of market share over the last couple of years, and they’re not going to give that up easily,” Steve Meyer, vice president of pork analytics at Express Markets Inc., said in an interview in Des Moines