This blog post is an adendum to my article Hungry Hogs Lift Corn Prices in Barron’s Commodities Corner column today, I included these charts in the original draft, but we had to pull them to make room for the text. You can click on any of the charts for larger and clearer images.
The chart above offers some perspective on the global hog market. China not only has more hogs than the next 43 pork-producing countries combined, China has 1.5 more hogs than there are Americans in the United States…and they all have to be fed. (Chart source: United Nations Food and Agriculture Organization via the 2011 Milken Institute Global Conference).
This chart shows the disparity between hog prices in the United States versus those in China. The reasons why are delineated in the Barron’s article. This disparity is what can lead China to import our hogs and put duress on US lean hog prices. (Chart source: Arlon Group)
The chart above shows just how much China relies on the market to meet its need for soybeans. Once they import the soybeans, the beans are “crushed” as it’s said, to create soybean oil and soybean meal. A whopping 98% of the meal is used for the 20% blend in hog feed that I mention in the Barron’s article. [Soybean oil is used for human consumption: cooking oil and salad dressing, for example.]
At the end of the day, China has only 7% of the world’s arable land, yet they consume 20% of the world’s grain production. The delicate balance between grains (corn and soybean meal) and hogs means that one outlier event, or better, one more horrible estimate from the USDA/Wasde and the whole grains/hogs complex will go parabolic.
Erin FitzPatrick, a phenomenal grains analyst in her own right at Rabobank, has much tighter expectations for the already historically-low corn stocks-to-use ratio this season. Erin’s forecast is at 4.0% (I’m with her), whereas the USDA’s are at 5.2%. To put that into perspective, that means the US is going to finish this crop year with about 7-weeks supply.
In equities, you may hear the expression, “stocks are priced for perfection.” I think that is the case for corn and soybeans in the commodity futures market where we saw limit moves this past week. Non-directional volatility, or equity whipsaws, are the norm. Therefore, I would trade small and conservatively. Don’t be a hog.
To add a twist to this story, I have been scaling into a spread position that consists of long hogs and short corn. A 40,000 lb. December hog contract was recently valued at more than $1,000 less than a December corn contract. Instead of betting on the price direction of either market, I am simply betting that the profit margin has to come back.
Good point regarding non directional price action in the short term. Having the right macro outlook and actually monetizing it are not necessarily the ahe same thing. I know a few macro traders who saw 2008 coming yet made no money as they were squeezed out before payday came. For every poster boy Paulson, there 3 guys who got squeezed out who you never hear about.
So when your macro forcast starts to produce positive unrealized pnl, then you add and press it. Getting a fat pitch or a good visibility on a macro trade doesn’t come often. If you get 1 per year, your doing good.
Verdad.
So true! I’ve been ‘right’ many times and failed to profit from it. Nothing worse than being right…and still losing money. There’s a world of difference between analysis and trading.
Just like in poker, you can make all the right decisions and end up with a
bad beat. Best part: no one cares about your stupid trading.