China Heats Up Hog Futures

By MARSHALL ECKBLAD | MORE ARTICLES BY AUTHOR

The nation's consumers crave the meat, yielding a six-fold jump in U.S. exports of the commodity. The demand looks to continue through the winter, overcoming a traditional decline in the autumn.

 

China's craving for the other white meat will let investors feast on higher U.S. lean-hog futures for months to come.

Pork is a cornerstone of the Chinese diet, and the country's consumers eat more of it than do consumers of any other nation. That dining preference is especially pronounced in the country's expanding urban populations of middle- and upper-class workers. They're using bigger incomes to eat higher-priced food and, in the process, have far outstripped China's domestic pork supplies.

U.S. hog farmers have been more than happy to feed that hunger. Their exports to China are up sixfold over last year, from January through July, according to the U.S. Agriculture Department. Exports to China are approaching 10% of the U.S. export market. But that hasn't been enough. Demand for U.S. pork imports will increase because China remains ravenous.

On the mainland, pork prices currently are 45% higher than they were last year, one aspect of widespread food-price inflation in a country where consumers still spend about 20% of their earnings on food.

While the price of other food staples are soaring, pork is so cherished that Chinese Premier Wen Jiabao last July was compelled to say, "Stabilizing pork markets is a responsibility that the government must not shirk."

China has little choice but to import more pork through the winter. Officials will want to keep prices lower and prevent domestic discord over food-price shocks. They also don't want to ruin the banquets and good cheer of the population when it rings in the Chinese New Year. The Year Of The Dragon begins with a 15-day festival starting in late January.

THE BUILDING DEMAND COULDN'T COME at a better time for U.S. hog farmers. Pork futures usually drop in the autumn. Supplies of animals often grow nearly 20% from August to November, as hogs gain weight more efficiently in the cooler weather. At the same time, U.S. demand weakens, as consumers put away their outdoor grills and eat less hog products.

Lean-hog futures for December, the most actively traded contract, settled Friday at 89.40 cents a pound. That's 15.55 cents higher than prices a year ago and 13.34 cents above the all-time high for a December contract at expiration. The October contract settled Friday at 94.67 cents a pound, and it is also poised to close at an all-time high.

But China's desire for imported pork should wane after the Chinese New Year's decorations are taken down. Beijing has long vowed to be self-sufficient in the meat, and it should demonstrate substantial progress around the end of winter, said Don Roose, president of brokerage firm U.S. Commodities. China has been organizing a modern pork industry while encouraging the nation's farmers to expand herds, in part by importing U.S. corn for feed.

But until then, China's appetite will make U.S. pork futures a tasty play.

Chinese leaders have yet another reason to keep buying U.S. pork: the weakening dollar. China can essentially exchange some of its greenback-based reserves, which have been losing value, and appease its public with cheaper meat.

"It's a perfect trade," said Randy Fisher, president of Fisher Commodities Services. "They can get rid of an asset that's losing value and buy something that they can actually use." 

MARSHALL ECKBLAD covers livestock and agriculture for Dow Jones Newswires and The Wall Street Journal.