Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Chinese Yuan
- Soybeans
- Japanese Equities
- Australian Equities
- Mexican Peso
Last week’s reversing trends:
- European Equities
- Singapore Equities
- Brazilian Real
- Russian Ruble
- Heating Oil
What we are taking note of:
A recurring theme of 2020 was China’s successful handling of the coronavirus pandemic. Its implications are vast and will take years to fully play out. Even in the short term, we can see the effects of Chinese economic strength everywhere in the commodities complex. That includes sectors that are usually not connected to Chinese demand, such as agriculture.
The Chinese, like the Spanish and the Germans, are a tremendous pork-eating nation. In China, pork is the primary source of protein, ahead of chicken and beef. China accounts for more than half of global pork consumption, and the Chinese hog herd provides about half of global pork supply. Its herd is 7x bigger than the US hog herd, the next biggest provider.
Starting in late 2018, African swine fever swept through Chinese hog farms. By the summer of 2019, the industry was decimated, with herd size down by a third. Chinese pork prices shot up, and there were shortages around the country. Imports increased, but they didn’t make much of a difference. The size of China’s herd dwarves pork’s availability around the world and global logistic chains cannot handle transportation of the necessary large amounts of either live animals or frozen carcasses from overseas. The problems with shipping tens of millions of live hogs across vast oceans are obvious. The world simply doesn’t have a fleet of ships capable of such a feat. But even frozen carcasses are not a realistic alternative. Refrigerated container ships (“reefers”) are a small fraction of the global shipping fleet and are in short supply. No matter how many excess hogs there may be in the US or Europe, they can’t be sold to China in meaningful numbers.
Prices of lean hogs on the Chicago Mercantile Exchange reflect the isolation of the US market from China. They are now at the same level as in January 2018, before swine fever struck China. Domestic dynamics are much more important for US hog prices than what happens overseas.
The same is not true for soybeans and soybean meal; however, 40% of US production is exported. Soybeans and soybean meal are easily stored and transported. Soybean meal, the residue left after pressing soybean oil out of soybeans, is the main ingredient in pig feed. By itself, Soybean meal represents 0.15% of total world trade by value (much larger percentage by volume). Global logistic chains are built to handle large volumes of soybeans and soybean meal easily.
The vagaries of Chinese hog herd size depressed demand for soybeans and soybean meal in 2019 and the first half of 2020. The situation rapidly reversed in the summer of 2020. China decided to aggressively rebuild its herd; its size stopped declining in July and grew by 31% year-on-year in August 2020. Pig feed imports into China are soaring: US soybean processing plants are running at record levels. China’s demand for livestock feed is likely to persist as long as its herds are recovering. They have quite a way to go before they get back to their usual size. Consumer demand for pork is strong and likely to grow as the economic recovery in China accelerates. The outlook of US soybean farmers is the best it’s been in years.
Soybean Meal – 2020 Year to Date
