US lean hog futures rallied last Friday as news said China will exempt additional tariff on certain volume purchase of US pork. Given China’s hog shortage and US pork’s deep price discount to China’s, we expect China to import more pork from US in 4Q19E, which should support US pork and hog prices.
- Lean hog futures soared. US lean hog future (Oct 2019) price jumped 6% last Friday (+11% over last two trading days) as various pieces of news showed China-US trade tension is easing. (1) On 13 Sep, according to Xinhua News, China supports enterprises to purchase certain amount of US pork and soy bean based on market principles and WTO rules. The Customs Tariff Commission of State Council would exclude additional tariffs on those items. (2) On 12 Sep, MOC said Chinese firms have started to inquire about prices for US agricultural goods including pork. (3) USDA reported that China bought 10,878 tonnes of US pork in the week ended 5 Sep, its biggest purchases since May 2019. (4) China and US officials will meet this week to discuss trade topics, according to Reuters.
- China’s hog balance continued to fall sharply in Aug. According to MOARA, hog balance and sow balance fell 38.7% (vs 32.2% in Jul) and 37.4% (vs 31.9% in Jul) YoY, respectively, in Aug 2018. We estimate the MoM decline of hog balance and sow balance were 9.9% and 9.1%, respectively, in Aug 2019. Compared to the MoM decline of 9% in Jul 2019, we did not see the fall of hog and sow balances eased in Aug. Given that it needs around 18 months to increase hog supply, we expect China’s hog price to stay high in 4Q19 and 2020 on tight supply.
- Expect a better 4Q19. We think the exemption of addition tariff and easing of China-US trade tensions are positive to WH, given that US hog price and pork carcass price trade at around 59% and 69% discount to those of China, respectively. Before China announced to increase US pork import tariff by 5-10% on 23 Aug with effective date on 1 Sep, US hog and pork carcass prices traded at 49% and 54% discount to relevant prices in China before such announcement. Given the China’s hog shortage and US pork’s deep price discount to China’s, we expect China to import more pork from US in 4Q19E, which should support US pork and hog prices.
- Maintain Buy. Our SOTP-based TP HK$9.20 represents 14.3x FY19E P/E. Catalyst: China reduces import tariffs or increases pork imports on US pork. Risk: Packaged meat and fresh pork margins below expectation.
