As a macro-speculator – I keep my eyes open for trade ideas from all over. Whether its commodities or currencies or even foreign equities.
And – if you remember – near the end of 2018, I mentioned the potential of a ‘pork-play’ building.
Well – it’s time I share with you more about it – and why it’s now a big opportunity (and how I’m playing it).
Here’s what you need to know. . .
To put things simply: there’s a harsh virus – known as African Swine Fever (ASF) – that’s crippling the global supply of pigs. Especially in China – the world’s largest buyer and producer of pork – which has already culled (aka selectively slaughtered) more than one million hogs due to this virus.
(Note that up to 200 million pigs in China could be culled – or die – from being infected with ASF. This would greatly reduce the nations hog supply).
Now – because of this sharp drop in China’s hog population – meat processors worldwide are selling greater amounts of pork to China to make up for the shortages.
(Remember – China’s favorite and principle source of dietary protein is pork).
As Bloomberg notes – “Some meat that used to go to the U.S. is now going to China because it pays more,” Jens Munk Ebbesen, director of food safety and veterinary issues at the Danish Agriculture & Food Council, said via phone call.
The blow-back from this is even tighter pork supplies in the U.S and Europe – which has pushed prices up significantly since the beginning of the year.
For instance – US retail prices for ‘boneless hams’ hit $4.31 per pound in March – the highest since 2015.
And in the European Union – wholesale pig prices have soared nearly 20% in just the last two months.
And – according to the Chicago Mercantile Exchange (CME) – ‘lean hog’ futures are up roughly 30% since February lows.
But the real impact of this ‘great pig culling’ will be felt in China. . .
For starters – due to this spreading virus – China’s hog population is plunging to “historically low levels” as farmers slaughter pigs left and right in attempt to prevent further contamination.
And making matters worse – according to a report by Rabobank International (a Dutch firm that specializes in agriculture financing) – Chinese pork production may sink 30% by the end of this year.
To give you some perspective of that number; a drop of that size – 30% – would be roughly the same as Europe’s entire annual pork supply. . .
Thus – due to this serious supply destruction – the price of pork in China could surge by more than 70% over the next 12 months.
But it won’t stop there. . .
Because of this ‘sick-pig’ crisis – Chinese consumers will be forced to eat less pork. And instead, turn to other proteins (aka ‘substitutes’) – like chicken, beef, fish.
This shift in Chinese demand may cause further meat supplies (chicken, beef, etc) worldwide to tighten. Especially as pork substitutes flow in to China to satisfy the country’s lacking protein.
Christine McCracken – an analyst at Rabobank International – said, “the price of all proteins is set to rise pretty substantially… It would be our expectation that as China imports more pork, supplies in other countries will get tighter and prices will go up, not just for pork, but for other proteins as well…”
Also – keep in mind – there’s been three large swine-virus outbreaks before this one (aka “hog cycles”).
All of which lead to pork prices soaring.
But this time – prices may soar higher than ever before. . .
There are three reasons I believe this:
First – although an increase in pork prices should entice Chinese farmers to herd more pigs – they may be increasingly cautious this time around with concerns of ‘African swine fever’ lingering about.
For instance – it will take at least three years to rebuild the hog population without any risk of ASF re-infecting the herd.
This puts farmers in a fragile position over the next few years as they re-build their hog herd. Because a single ASF-contaminated hog could ruin their entire young herd.
It may be less costly (and less risky) to instead focus on herding other animals.
Second – signs of this negative farmer sentiment is showing up through the plunging ‘hog-to-corn price ratio’ – a key metric indicating that the feeding costs versus the sale price of hogs has become unprofitable.
And Third – most of the China’s breeding herds (aka ‘sow pigs’ – the females) have thinned out. This means less pig births – leaving a deficit that will lower the future domestic hog output.
All this – and more – is why I expect pork prices (and other meats) to rally for the foreseeable future.
More hogs will be slaughtered as the Chinese attempt to contain the virus from spreading – further straining an already tight (and fragile) hog supply.
So – as speculators – we need to ask ourselves: is there any upside from this horrible pork culling?
I believe so – and this is how. . .
By purchasing shares of meat suppliers – such as JBS SA (OTC:JBSAY), a Brazilian based producer of animal protein – which will see higher margins on their pork (and other meat) products as global supplies tighten.
Even major investment bank – Morgan Stanley (NYSE:MS) – raised their recommendation on JBSAY to ‘overweight’.
That’s because JBSAY has beef, chicken, and pork operations all across North America, Europe, and Australia . Far away from the incurable virus.
JBSAY – according to Morgan Stanley analyst Rafael Shin – has a solid “combination of category [meats] and geographic exposure, scale, capacity utilization, and existing access to the Chinese market – sets it apart…”
Thus – the Brazilian meat powerhouse is perfectly positioned to benefit from the swine virus upside. . .
Note that shares of JBSAY are up significantly over the last few months. But still far behind behemoths like Tyson Foods (NYSE: NYSE:TSN) on a USD market cap basis.
So – in summary – JBSAY offers significant leverage to rising meat prices as the pig-plague continues and meat prices rally.
I believe JBSAY shares have further upside – and I have been buying on the sharp dips.
But – I warn you though – there are some risks.
For instance – there isn’t much of a margin of safety (downside protection) with JBSAY. The balance sheet isn’t the cleanest.
Also – Brazil’s currency – the Real – is in decline against the U.S. dollar. This could put pressure on share prices.
And true – the fear of the ASF virus could be pushing hog prices higher than they should be.
That’s why – once I see the current supply-and-demand for meat reversing (falling prices), I will exit this play.
But – for now – I still see a longer-term deficit in the hog supplies which will keep prices up for some time.
Of course – although I feel bad for the poor hogs – the job of a speculator is to find an opportunity and exploit it.
This is why I own shares of JBSAY and am holding for now.
Because the rally has only just begun. . .
As always – do your own diligence.