The U.S. hog industry has substantially expanded production in recent years to accommodate growing export demand for pork. Over a quarter of all U.S. pork is exported. Since U.S. markets have become more reliant on exports, trade tensions that first flared in the summer of 2018 led to heightened volatility and downward price moves. However, 2018 pales in comparison to what has occurred so far in 2019.
ASF in China
The discovery and subsequent outbreaks of the African swine fever (ASF) virus in China have sent shockwaves through the world pork market. ASF is a highly contagious virus that ravages hog herds. The death rate associated with ASF is over 90 percent and currently there is no vaccine or cure.
China produces and consumes more pork than any country in the world. According to the most recent estimate from the United States Department of Agriculture's Foreign Agriculture Service (USDA-FAS), China has approximately 430 million pigs. To put that into perspective, the entire U.S. herd is 75 million. So, when estimates pegging potential losses in China at 30 percent of their herd or greater began to circulate, CME Lean Hog futures prices increased sharply and swiftly.
The Global Price
The CME Lean Hog Index tracks the prices of U.S. domestic, producer-sold hogs as reported by the USDA. CME Lean Hog futures and options settle to the Index price and are the only instruments in the world that track the price of hogs.
For this very reason, the world uses the CME as the benchmark price. As ASF has become more and more of a threat to the world's pork supply, CME Lean Hog futures and options have experienced a significant increase in both volume and open interest.
What to Watch For
With so much uncertainty about ASF in China and its potential to spread to other parts of the world, it is likely that volatility will remain high for futures and options. Open interest, or the number of contracts held open, for options on Lean Hog futures has reached its 10 all-time highest days in April and May, with a record of more than 432,000 contracts open on May 15. Lean Hog futures reached record open interest on May 7. Interestingly, the previous all-time high for Lean Hog futures open interest occurred in 2013 when the outbreak of the porcine epidemic diarrhea virus (PED) killed over 7 million U.S. hogs.
If a trade resolution is reached between the United States and China, it could present opportunities for U.S. pork producers to fill in for at least some of what has been lost to ASF. On the other hand, should ASF make its way to the U.S., the impact on U.S. prices and exports would be devastating. Either way, as the Year of the Pig continues, Lean Hog futures and options will be the key measure to watch, and the tool for the industry in navigating potential price swings.
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(This article is sponsored and produced by CME Group, which is solely responsible for its content.)