Global Markets in Commotion

Inflation has taken center stage in global commodity markets over the past few months.  Further attention was      garnered when the U.S. core inflation rate rose to 4.2% for April.  Some suggest this is just temporary and there is no need to raise alarm of future interest rate hikes.  I’m not one of them.  These rising prices are a function of    government stimulus, economic recovery in the wake of COVID vaccines, and continued cheap interest.  Demand is now chasing supply.  And until a glut of production can be obtained, high prices will reign.  External factors such as drought risk in South and North America (drought recovery in Australia) and Chinese demand for grains and meat, also suggest prolonged higher prices.

We have seen new record high prices for Australian and Brazilian cattle recently.  And sharp increases in global  prices for hogs, pork, chicken, beef, corn, soybeans, and other agriculture commodities.  While that is the “nutshell” story of global meat and feed markets, there is a major, looming outlier.

There is one key commodity that has seen sharp DEFLATION this year, down –48% since January.  And I have referred to it for the past 2 years as the key driver of global protein:  China’s live hog prices.

This move has devalued the single largest global protein supply even as nearly all other global proteins have seen sharp inflation.  This conundrum is significant and worthy of discussion.

First, there are two messages regarding the cause of China’s  precipitous hog price collapse. The Chinese government has ramped up their messaging of a successful recovery from African Swine Fever (ASF) losses.  They reported last week that they are now 97.6% recovered.  That suggests a successful restocking and commercialization of roughly 20 million sows over the past year; in a country that is riddled with ASF and other swine diseases.

The second explanation appears much more reasonable:  A   second wave of ASF swept China’s hog sector this year, leading to heavy culling.  Non-government reports out of China suggest 30-50% of the herd has been culled.  Heavy culling drove these price declines with a very different expected result.

A Chinese proverb states “3 things cannot long be hidden:  the sun, the moon, and the truth”.  If this price data remains trustworthy, either prices will stabilize down below 18 rmb/kg suggesting a successful recovery, or the roller coaster will begin again with prices soaring higher, back above 30 rmb/kg and possibly approaching 40 rmb/kg again, confirming the 2nd wave of ASF losses.  Time will tell.

And how do we reconcile this big China hog devaluation against rising prices globally?  China’s weakened pork prices have yet to stifle their import demand for global proteins; China’s pork imports were record high in April, the most recent month of data.  – Brett Stuart