For good or ill, our markets are global. The flapping of a butterfly’s wings in Japan may not cause a hurricane in the Gulf, but news of a hog disease in China—or news of trade talks with China—can cause market spikes here at home.
On Thursday, Aug. 16, word came that a second case of African Swine Fever (ASF) was confirmed in China’s hog herd. This was significant for several reasons, not least of which being that it was thousands of miles from where the country’s first case was and that ASF is a very virulent disease that can cause significant losses in infected herds.
But the other noteworthy element was the impact on our U.S. hog markets, which spiked limit-up on Aug. 16 after roughly two months of volatile declines. This sudden spike had the effect of dragging other commodities’ futures up too, including live cattle and feeder futures.
However, it is also possible that word of trade talks with China, and the potential wrap-up of bilateral trade discussions with Mexico that coincided with the ASF announcement had more to do with the gains than did China’s ASF news.
On Aug. 16, the first three near-term contracts of the CME lean hogs futures settled limit up ($3) with the rest of the board seeing triple-digit gains that declined as contracts got more deferred. The following day saw the October lean hogs contract trade up $3.12—into its extended range—and the rest of the board continued to see triple-digit gains.
On Monday, Aug. 20, the CME Daily Livestock Report noted that the hog futures had gained over 600 points (+11.6 percent) in those two days.
But, as mentioned, the movements were not limited to the hog futures. Gains were seen across the cattle markets, with gains near $1 in near-term feeder futures on Thursday, Aug. 16. On the following Friday, near-term live and feeder cattle futures saw gains between $1-2.
Dr. Lee Shulz, an associate professor at Iowa State University’s Agricultural and Natural Resource Economics Extension, explained a bit about the interconnectedness of the different livestock futures.
“The reason you see the impact there is because of the substitution impact potential,” he told WLJ.
“If you talk about a rally in the hog futures, that just means that hog prices got more expensive and beef can become more competitive in that equation when we talk about consumer demand.
Fever or trade talks?
Just what caused the spike in hog futures is up for discussion.
“Lean hog futures were up the daily permissible limit following news of a second case of African Swine Fever in China,” reported the CME Daily Livestock Report on Friday following the disease news. However, the spread of the serious disease in the world’s largest swine herd wasn’t the only thing making headlines.
“I would attribute a large majority of the recent move in the futures to, really, trade negotiations or talk of trade negotiations,” Shulz said last week, adding that there hadn’t been much supply-related news that would suggest such a sudden market move.
“We had heard on Friday that Mexico’s economy minister hoped to have the outstanding bilateral trade issues worked out by mid this week surrounding [the North American Free Trade Agreement]. Also, news that the Chinese trade delegates would be in country and hope to resume talks.”
The U.S. was in talks with both Chinese trade officials, and Mexico’s Economy Minister Ildefonso Guajardo, late last week. Unfortunately, verifiable details on the talks with Chinese trade officials were scant.
Talks between Guajardo and the U.S. Trade Representative’s (USTR’s) office occurred Thursday, Aug. 23. According to the Wall Street Journal, Guajardo played down the likelihood that some key remaining issues between the U.S. and Mexico on the North American Free Trade Agreement would be completed quickly when talking to reporters prior to speaking to the USTR. There had been early optimism of this potential but by press time, no announcements had been made. — Kerry Halladay, WLJ editor