How Will African Swine Fever Affect World Supplies and Prices?

In recent weeks, cases of African swine fever (ASF) have been reported throughout the world, and perhaps of most importance, China. This disease affects hogs, and there is no known cure. Eradication is the only option. It is also highly contagious. While the Chinese government is taking aggressive action to eliminate hogs where cases are reported, it puts the world on alert that a drawdown in China's hog herd is possible. More importantly, how a drawdown in Chinese hog production will affect world supplies, and what happens if ASF spreads elsewhere, in particular the U.S.

It is estimated there are between 400 and 500 million hogs in China. Roughly 20% reside in large hog farms, from which more than 10,000 pigs are marketed per year. By that math, 80% of the hog population is located on smaller farms. Given the fact that China is an overcrowded country, most of these pig operations are likely run by families, each with a few pigs in their backyard. This would suggest the potential for a rapid spread of contamination. It is estimated that China has culled over 40,000 hogs. From a big-picture perspective, this is a drop in the bucket compared with overall population. However, if infected hogs become more prevalent, this may have major implications for China because they are a net importer of pork products (despite being the world's largest pork producer). This implies that every hog exterminated will need to be imported.

Most supplies of pork to China come from the European Union, United States, and Canada. The U.S. could potentially become a much bigger supplier, as the European Union has limited room to grow the existing herd. Canada has the same logistical issues, and the majority of their pork production is already exported.

Drawdowns of pork supplies in China could be the catalyst for a quick resolution to recent trade tariffs between the U.S. and China, as the need for food (pork) becomes paramount. On the other hand, if ASF becomes a nonevent, prices could decline from their recent rally of near $20.00. Currently, the market is at a crossroads. If disease issues increase, prices may be on their way to exploding. The most recent example is the porcine epidemic diarrhea of 2014, when April futures exceeded $125.00 and June over $130.00. That said, there is also considerable downside risk from current price levels.

There are ways you can take advantage of favorable prices and still protect against unfavorable price moves. A couple of considerations for producers are to purchase puts to establish a price floor in the futures market, or contract hogs in the cash market and purchase a call option to retain ownership in the futures market. You could also sell futures and purchase a call. In these examples, the call option is designed to cover sales if prices rally. Calls benefit the owner in an uptrending market. Whatever strategy you incorporate, have a clear understanding of the risks as well as potential benefits.

If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.