2018 proved to be a big year for global tariffs. The trade standoff between the U.S. and China had a significant impact on international markets, affecting everything from agriculture to automobiles. The pork market was among the hardest hit.
When it comes to trading livestock derivatives, the Lean Hog contract available on the Chicago Mercantile Exchange (CME) is one of the premier offerings. Producers and speculators alike trade the Lean Hog product in an attempt to preserve or gain market share. Here are the contract specifications for CME Lean Hog Futures:
| Unit | 40,000 pounds |
|---|---|
| Quote | Cents per pound |
| Minimum Tick Size | $10 per tick |
| Symbol | HE |
| Settlement | Financial |
| Emini Natural Gas | QG |
As with the majority of agricultural products, regional and international geopolitics often play a key role in asset pricing. Throughout 2018, this was certainly the case for the pork. The U.S. and China instituted a new collection of global tariffs, which dominated market sentiment.
The U.S., China, and Pork
When it comes to world’s pork trade, the U.S. and China are two key players. Matching one of the world’s premier producers to a consumer goliath, the U.S.-China relationship is an integral part of the international swine trade. According to USDA statistics dated April 2019, each ranks near the top in several categories:
- The U.S. accounts for 64.01% of North American exports and 30.84% of global exports. The U.S. ranks second in the world in pork exports, behind only the European Union.
- The U.S. ranks as the third largest producer of pork in the world, responsible for 78.86% of North American production. In addition, the U.S. accounts for 11.43% of output worldwide.
- China ranks first internationally in pork imports. 44.5% of all East Asian imports are attributable to China, representing 25.1% of imports worldwide.
- China ranks first in domestic consumption of pork. 88.84% of East Asian and 46.69% of global consumption are attributable to China.
Given China’s standing as the world’s leading consumer of pork and U.S. production capacity, it stands to reason that the U.S.-China pork trade would be robust. As of 2017, China purchased $662 million worth of pork from the U.S., trailing only soybeans, cotton, and feed grain as its leading ag imports. According to the U.S. Meat Export Federation, China is the number two purchaser of U.S. pork, behind Mexico.
Trade Wars and Global Tariffs
Because the U.S.-China pork trade is so extensive, producers and consumers on each side rely on a strong working relationship. However, the 2018 U.S.-China tit-for-tat exchange of global tariffs derailed the exchange. Fallout was extensive, as was the impact on Lean Hog futures.
While the tangible value of global tariffs is an economic hot-button issue, they certainly have a profound influence on the markets. Over the course of 2018, China launched a series of retaliatory tariffs on U.S. agricultural exports, many of which were aimed at pork. Tariff levels were raised from an average of 12% to 20% to 45% to 70% on U.S. pork. The dramatic increase shocked Lean Hog futures (HE) pricing:
- CME Lean Hog front-month futures fell by 41% during the near-term following the tariff enactment.
- August 2018 featured the highest monthly volatility of Lean Hog futures in more than 20 years (57%).
Fortunately for pork producers, the negative price action was somewhat short-lived. Toward the end of 2018, a breakout of African Swine Fever in China significantly reduced domestic supply. In addition, early 2019 brought rumors of U.S.-China trade deals, and by April 2019 pork prices climbed more than 60% year-to-date, nearing their highest levels since 2014 and boosting June Lean Hog futures upwards of 25% from February 1 to April 15.
Getting Started in Ag Futures
Global tariffs play a key role in foreign commerce, but they’re not the only fundamental capable of swaying markets. Weather, disease, and even dietary fads can influence the price of commodities such as pork. Staying up-to-date on the entirety of the market is a key to preserving market share in the long-run.
One way to stay on the competitive lead lap is with the DanielsAG Mobile App. Featuring breaking news, daily market overviews, and expert recommendations, the DanielsAG Mobile APP has everything you need to remain informed on all things ag.
