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US lean hog futures surprise on the upside despite Covid and high inflation


Chicago Mercantile Exchange lean hog futures have performed surprisingly well in the face of high US inflation, high Covid numbers and raging storms. They are up 12.6% since the start of the year and could see more upside as some of the problems like labour issues and bad weather ease.

Over the past two weeks CME April lean hog futures kept nudging contract highs. The bout of profit taking that followed each of the rallies didn’t really manage to dent the upward trend. Having touched the latest high of 100c/lb April lean hog is trading at 98.375 cents a pound.

US corona infection numbers are beginning to fall dramatically and in the last seven days have dropped 42%. As the country pulls itself out of the current wave of the epidemic bars, restaurants and businesses are beginning to operate closer to normal levels and meat sales are on the rise. Even in December when Covid numbers were raging, retail meat sales increased year-on-year and also increased above pre-Covid sales levels in 2019.

Heavy snowstorms in parts of the US and labour shortages have made a dent in slaughter rates over the last few weeks but smaller live hog inventories have eased pressure on processors and are likely to continue to do that into the spring. “According to the latest US Department for Agriculture quarterly hogs and pigs report, the US inventory of all hogs and pigs was down 4% over the prior month versus an expectation of 2.8%,” said ETF specialist WisdomTree in its Commodity Monthly Monitor.

The bigger picture for lean hogs

The US is the world’s biggest exporter of pork, selling internationally at least twice as much pork meat as the next largest exporter Canada. In the past decade most of that pork was sold to Japan, Mexico and Canada but that ratio has tipped dramatically into China’s favour in the last two or three years because of an outbreak of the African swine fever (AFS) in 2018 which obliterated China’s pig stock.

While, for instance, exports to Japan rose only by a modest 4.7% between 2016 and 2020 exports to China exploded, rising 220%. During the worst of the US-China trade wars under Donald Trump in 2020 the US went from selling $1.3 billion worth of meat to China to $2.28 billion. Sales were also helped by a weakening dollar/yuan which has been steadily declining since mid-2020.

China has been rebuilding its pork herd ever since and has managed to bring it up to pre-outbreak levels. Consequently, China is expected to import far less pork meat this year, less than a half of the 2021 imports but the decline will be mitigated by currency effects. But a risk factor remains as cases of AFS have been reported in the country as recently as December and January.

In terms of exports to the rest of the world, the inflation-related weakening of the dollar will play into the hands of pork exporters and international sales outside of China are likely to continue to rise.

Lean Hogs ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Lean Hogs
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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