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Possible African Swine Fever Epidemic
in China Could Spell the Beginning for a
New Sustainable Bull Market in the
Lean Hog and Cattle Markets

The Potential for improved Trade Relations with Mexico/NAFTA and China Along with a Possible Pork Supply Shortage Shock from a Possible African Swine Fever Epidemic in China Could Spell the Beginning for a New Sustainable Bull Market in the Lean Hog and Cattle Markets, notes Shawn Hackett, President, of Hackett Financial Advisors and publisher of The Hackett Money Flow Commodity Report, www.HackettAdvisors.com.

As we have been discussing for months now, both the cattle and hog markets have been seeing very bullish smart money buying patterns that have triggered buy signals despite massive increased US supplies, stronger US Dollar and trade war anxieties.

Investors were puzzled and questioned why smart money was so bullish. There did not appear to be any clear signs of an imminent bullish fundamental change and yet the smartest and most well-informed players in the live-stock space were buying like crazy.

The beauty of this smart money indicator is that we do not need to know why they are buying…we just need to now when their buying reaches a level that has historically meant an important low.

The clarity often times will become sell evident later on as to why they were buying and why they thought prices were in fact going to be rising substantially. They are not always right, but they are right a very high percentage of the time.

Well, that moment of clarity has in fact just taken place in the hog market and the indications for a dramatic shift in supply/demand fundamentals for hogs and by default for cattle that could start a bull market of the ages are clearer.

What was that moment of clarity that we know now and that the smart money knew for a while?

It Was The verification that a second outbreak of the “The African Swine Fever” has been detected in another province of China same 1500 miles away from the last incident a month ago.

The above is not entirely true as further investigation found out that this disease was actually started back in April of 2018.

African swine fever (ASF) is a highly contagious hemorrhagic disease of pigs, warthogs, European wild boar and American wild pigs. All age groups are equally susceptible. With high virulence forms of the virus, ASF is characterized by high fever, loss of appetite, hemorrhages in the skin and internal organs, and death in 2-10 days on average. Mortality rates may be as high as 100%. The organism which causes ASF is a DNA virus of the Sphaeriidae family. ASF is a disease listed in the World Organization for Animal Health (OIE) Terrestrial Animal Health Code and must be reported to the OIE Terrestrial Animal Health Code.

There is no known cure for this so the only way to eradicate it is to slaughter animals and quarantine areas that have been impacted to prevent further spreading of disease.

This African Swine Fever has been a major problem for Russia/Ukraine, so we have some very good data points from which to make projections on what might happen in China should this pig disease get out of control.

A detailed study was done by the Federal Research Center for Virology and Microbiology in Russia on the impacts of the African Swine Fever had on Russian hog herds and pork production.

It was found that between pig deaths from disease and needed quarantine forced slaughtering’s of impacted hog areas that 15% of the hog herd was lost during the time of containment.

It also made mention that backyard swine production (small hog farmers operating in their backyard) where very little quality control exists, or supervision exists declined by 50%.

Keep in mind that Russia’s hog density per acre in the areas infected were fairly low at only .07 hogs per acre whereas in China, due to over 50% of pork production being from backyard producers, the hog density per acre is 20 times that of Russia.

So, one could easily infer that the Chinese may have a much larger problem on their hands in trying to contain this beyond the percentages of the study of the Russian experience.

If 15% of the Chinese hog herd were removed due to death and forced slaughtering, that would be the size of the entire amount of pork that is exported around the world every year.

Please read that sentence again and breathe it in.

That’s means that the Chinese in order to replace this lost production would consume the entire global export market themselves.

Clearly, that would cause a massive schism in the world pork market and cause the need for massive demand rationing to take place.

There really would be no way to satisfy that from the current available pork supply so Chinese consumers would look to beef or chicken etc. for replacement meat protein consumption.

So, this issue is not just bullish for pork prices but it is also bullish for all protein meat markets.

We will learn more over the next few months on the extent of this problem in China but, suffice it to say, that given that this disease has already been found in 3 different places since April 2018 covering a 1500 mile expanse with a huge pig density profile where there is still over half of all producers conducting backyard operations, the odds have gone up substantially that this problem may already be out of China’s control.

Needless to say, end users of pork should be increasing coverage of future needs and protecting upside prices risk with call options. Investors/traders should be looking at December futures and December call options to do the same. A weekly close above $.56/pound on the December lean hog contract would be the first technical buy signal while a close above $.60/pound in a weekly and monthly basis would offer an additional signal.

Editor’s Note: This is an edited version of an article published for subscribers of The Hackett Money Flow Commodity Report. Shawn Hackett provides market analysis for hedgers and investors. For more information visit www.HackettAdvisors.com

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