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11/05/2016

Egg’s Futures Prices Supported by Pork While Still Damped by Supervision
Egg, as one of the best friends of Pork, spiked because of inflation and capital factors, but declined to 4000 points soon after attaining the 4310 points daily limit.

Historically, eggs’ spot price has always been closely correlated (90% ever) with pork price, especially the price hike of pork impacted egg price no less significant.

“High pork price played a key role on drive egg’s price up instead of coming down.” Jim Huang, the CEO of China-data said. However, the life cycle of the two is different. Egg is now confronted with oversupply so that its high price won’t last long. The spot price is expected to be weak.

The monitoring data from China-data shows that the number of laying hens in March monthly increased by 1.06% to 1.219 billion, up by YOY 15.02%. Newly laying hens also grew in number which accounted for a large proportion of livestock on hand of laying hens. Egg in after-market would be likely to oversupply, giving pressures on the egg price.

A previous price burst of egg futures was attributed to higher pork price, inflation and capital flow. Nevertheless, the oversupply of egg can not fundamentally change the declining tendency of egg price.

In addition, supervising policy on egg industry as a significant factor to bring down a fever on egg market, can never be neglected.

The price of commodities in recent times has been so glorious that caused government’s attention. Upward adjustment of commission charge and shortening trading time are both used to cool the market overheating. The commission charge of coking and coking coal has been the 12th of the previous by CME, up to 0.72‰.

Yan Wenjie, investment strategy analyst from China-data said, there was a steady demand for eggs, thus guaranteeing a sufficient short-term supply. But the stocking-up of egg around Dragon Boat Festival could only provide limited consumption that far from eliminating the pressure of overstock. It was probably for the market to decline with slight fluctuation. “In view of spot eggs, the basis of JD1609 having a premium of 1000 points, its futures price is likely going to be hard to lift up. What’s worse, the spot market is expected to be pessimistic, so the futures price is more probable to be down in the future.”

Hog cycle continuing, however, pork partly became the substitute of egg owing to the former’s fervent price, which somehow supported the egg price. Also, the inflation expectation and capital flow constrained the speed and range of price declination. Recent attention should be attached to 3950—4000, Yan added.

28/04/2016

New Investment Opportunity Given by “Hog Cycle”: Feed Futures

Nowadays, pork price nearly approaches unprecedented high level. Feed stuff, which comes hand in hand with hog industry, will fluctuate along with hog price. In this cycle, livestock on hand of pigs is in an urgent need to be restored as it is now rather low. So the demand for feed is expected to pick up in the last quarter of this year. Over the last two weeks, price of agricultural products, as well as manufactured products both experiences a spike.

Corn price influenced by present policy
The recent price rise of corn is mainly caused by hoarding storage excessively. Zhao Zhou, the oil and oilseed analyst from China-data introduced, “ The total volume of corn yield in 2015 was about 224.5 million tons, 114 million of which has been reserved in storage. What’s more, the quality of corns yielded in 2015 was much better than that of previous years. Now half into storage, high-quality corns in the market seemed to be insufficient.” Pigs’ livestock on hand getting a plenty more brought larger demand of feed to anthony pigs and piglets. It is no wonder that the price of high-quality feed would rebound.

As Zhao mentioned, people became more concerned about when and how to sell temporarily storage of corn instead of policy expectancy. The short-term price of corn of the next two months was based on the de-stocking policy. There is no glue about the policy on unloading stock though, corns that is going to be undersold might be low-quality ones, which was not used as feed for those “golden pigs” but for ethyl alcohol and starch processing. It is inevitable to enlarge the spread of the price between good and bad corn.

Import as the crucial drive for Soybean meal
After continuous upward trend for 9 days, this week, the price of soybean meal climbed crazily to the limit and rapidly declined after the incline. Zhao Zhou commented that (potential) buyers and sellers, either of whom determined the price at different time, always exist and work together in the market. The recent price rise and decline of soybean meal in China was just a beginning, with a great “conflict” between sellers and buyers following on.
On the basis of Zhao’s analysis, the price rise of soybean meal was largely on account of out disk and capital flow. The price of US soybean and crude oil booming and decreased USD exchange rate all brought China’s soybean meal price up and up rapidly. “what’s more,” he said, “ people’s investing fever on oils market gradually vanished when they heard of bad news coming from Malaysia’s oils yield report. Soybean meal attracted much more short-term investments, thus a high position came out in those days’ quotation.

“Hog cycle” indeed, influences the demand of feed like soybean meal, but not the largest one. Zhao believed, “ it needs time for feed price to go up in spite of higher and higher pork price now. According to the culturing cycle and market supply and demand, hog supply would recover even increase after September when the livestock on hand might help to improve the price of feedstuff. The future trend of price is both determined by relationship between demand and supply and importing costs of soybean. As for the supply of soybean, its importing volume between April and June is expected to be 24.32 million tons that increased by 24.5% compared with 19.53 million of last year. From demand side, it is suggested in data released by China’s Ministry of Agriculture in March that the decrease of livestock on hand of live pigs and reproductive pigs will come to an end. He also noted, “if importing soybean keeps increasing while breeding industry depressing, the price of soybean meal will be pressed.”

“Promising” arbitrage in the future
Zhao Zhou put forward two arbitrage strategies on feed investment. The first one is calendar spread arbitrage of RM9 and RM1—to buy the former and sell the later. He analyzed that the demand for rapeseed meal is of obvious seasonal characteristics. For example, during the first stage of aquaculture (April to September every year), the spot price of rapeseed probably goes up high, but the aquaculture’s demand for rapeseed meal declines after October. From the respect of supply, domestic newly-produced rapeseed meal has not come into the market yet. It is reported by several institutions that China’s yield of rapeseed meal would experience a sharp drop this year, and those meal processed by importing rapeseed would also decline compared with last year.

Besides having deliberated over with other experts in this field, China-data believes that there would be a rigid demand for rapeseed meal upon the proportion of soybean in aquatic feed maximizes and soybean meal’s substitution effect on rapeseed meal would not grow rapidly. Therefore, Zhao suggested: now that the premium of RM01 and RM09 is not large but may become larger in later time. It is proper to open a position when the gap is under 50 points. 150 points is the prior expectation.

The second plan is cross-varieties arbitrage between soybean meal and rapeseed meal. That is, to buy SM1 and sell RM1. Zhao added, aquaculture’s demand for rapeseed meal lasts from April to September while demand for soybean meal lasts for the whole year. Moreover, China’s soybean meal depends a lot on US soybean whose yield will probably be lower than that of last year.

Correspondingly, the price of domestic soybean meal would also surge. His advice: the premium now is small but likely to be bigger. It is favorable to open a position when the premium becomes around 500. The prior expectation is 600.

26/04/2016

Hog Cycle, Where to Go?

Pork price spiking in this hog cycle nearly makes Chinese investors prefer raising pigs to investing in stock. People also worry about pork price in supermarkets getting higher and higher.
According to the data of hog markets monitored by China-data, pork price rose by 0.4% in March, 2016 compared with that in February, 35.1% compared with last year, which is RMB 7.53/kg in number. The sharp rise is rare in comparison with the same period of previous years. Slack season of pork that would have started after Spring Festival did not show up this year. The overwhelming price rise is getting closer to the peak of the busy season in Sep. 2011. Farmers’ enthusiasm of adding livestock on hand also contributes to pushing pork price up high, said by Yao Guiling, a poultry analyst from China-data.

Hog breeders feel happy about the price, while buyers upset. Net profit of raising pigs amounts to 100 yuan each. According to the data calculated in the first week of April, each of fattening pigs over 110kg propagated and raised by themselves would make profit by 840 yuan for slaughter. Yao noted, apart from the short supply, large profit “also thanks to the dramatic decline of feed costs”.

The growth rate of hog’s total livestock on hand would be 2%. Slaughters would be down by 10%. After this hog cycle, large-scale pig farms with over 500 pigs slaughtered would account for more than 50% among the whole industry, Yao noted, and she also predicted, “this cycle may last much longer even till April, 2019 because of the long-time insufficient productivity. The price peak is expected to appear in around January.2017 as RMB 22 to 24/kg. Generally, pork price would maintain a high level in 2016. It would not be less than 20 yuan until April, 2017."

Yao pointed out that the strong hog cycle has it's own reasonable ground. From the perspective of supply, first, low productivity for a long time shrunk the pig supply. Meanwhile, the livestock on hand of reproductive sow reduced resulting in lower supply of commercial pigs 10 months later, even unfavorable to the pork price one year later. Second, strict environment policy set pig raising back. A series of ban, limitations and demolitions in many areas in China also badly stroke the pig supply. In addition, the high price of fodder in the first and second quarters of 2015 together with labor costs increasing lowered profit of raising pigs. Breeders were not so willing to add the herd. Worse still, heavy losses of the industry needed time to amend. Last, epidemic disease became the last straw. Since the extreme weather from the late 2015 to early 2016, swine disease like foot-and-mouth disease and piglet scours were common in many areas, thus piglet’s rate of survival was rather low. Telephone survey by China-data showed that piglet morality rate had come to over 30% due to those “killers” above.

As for demand, companies had strong intentions to purchase for their low stock of freezing meat and good demand for slaughter, which boosted pork price as well.

Yao Guiling made a forecast about the future trend of hog cycle from livestock on hand and price. “Referring to data of the last cycle , and in consideration of better productivity of larger breeding scale and stronger wish to add livestock on hand, it is estimated that livestock on hand of reproductive sow would increase by 3%, to 3.927 million. ”

21/04/2016

Hog Cycle – the “Counterattack” of Hog Price

After several years of low prices, the price of pork rose this year to a new historical peak. Reviewing the fluctuating pork prices in China, there is an obvious "hog cycle", which mainly drove CPI in March. People are confused what is the "hog cycle", and how did it become revealed.

Hog cycle means the cycle of hog price. When the price of pork rose, farmers would like to add stock and to slaughter less pigs, which causes a rapid growth of sow livestock on hand and then hog supply increasing, resulting in the price falling of pork. By the time the following profit squeezed impelled farmer to cull their sow, hog supply in the market begins to decline; thus the pork price goes up in a new cycle.

According to Huang Jinwen, CEO of China-data, the origin of the formation of hog cycle in domestic market is due to the low level of scale breeding in China. It is suggested by statistics from China-data that small and middle-scale breeding farmers played the most important part in the breeding process. On the contrary, less than 50% of farmers produced over 500 grown pigs for slaughter. Therefore, a sharp rise of pork price would attract farmers to swarm into the market, adding so much stock that oversupply of commercial hog may lead the hog price to fall in some period. Nevertheless, continuous falling in return makes farmers anxious to slaughter more pigs, thus followed by more serious price dropping. In general, farmers’ “psychological diathesis is not strong enough” to overcome the blindness to follow the trend, which gives a rise to sharper fluctuation of hog price in the cycle.

The first hog cycle among the latest three started in May of year,2005. Those three cycles had respectively lasted for 37months, 47months and 59 months. SARS, PRRS(porcine reproductive and respiratory syndrome),clenbuterol as well as depressed macro economy impede the stability of hog price.

Recently, continuous rise of hog price makes buyers all over the country suffer. Actually, the new hog cycle began in April, 2015. Hog price generally increased by 60% for the badly short supply from March to August, 2015. After the winter solstice, pigs sold much better around China, the supply became more insufficient and hog price sharply increased before the Chinese Spring Festival of 2016. By the beginning of 2016, price rose suddenly and sharply. Compared with last year, hog price in January rose by 34.18%, 49% in February, amazingly high. Price had been up and up until this March, rising by 5% compared with that of last month, and 62% compared with last year.

All the situations above constituted the Strongest Hog Cycle, and even helped to lift CPI. However, pork has declining influence on CPI, Yao Guilin, the livestock analyst from China-data said, “Before 2016, food stuff accounted for a rather large proportion of CPI, among which pork was over 10%. After the fourth CPI base rotation in Jan.2016, the weight ratio of food, alcohol and to***co decreased by 3.4%.” China-data’s speculation shows that the ratio occupies about 30% now, among which pork’s has been down to 2.3%. So the hog price would affect less on CPI in the future.

18/04/2016

More Derivative Contracts are Being Called for in China

Without proper instruments in derivatives market, it is difficult for the companies whose products and raw material experiencing high price volatility to maintain a stable profit.

Nowadays,the price of hogs has been pulled up to the topin the time span of last 4 years, where the farming industry gets great profit in the first quarter.The sustained low hog price 3 years ago seems to be a nightmare for them,in which period the scale of hog farming shrank,and many farmers gave up farming hogs.As the hog price falling below the cost,there was a two-third empty in farms that had the original size of ten thousand.

For companies providing feeds and farming,the cost of raw materials and finished goods price directly affect their operating profit.In the industry downturn period,many companies learned to use futures tools to lock their cost.”Now,companies using futures to hedge is not something new.”Said Tan Zhilin from ShenZhen JinXinNong Feed co.,LTD..

“In the trough of hog market we can only transfer risk by expanding industry chain and building brand advantage.”said the responsible officer of a Guangzhou farming company. But the problem is that if the hog price stay at a low post, the price of pork and processed products will also go down.But transferring risk in this way will bring great limitations.

He explained that many domestic provinces pilot hog price insurance already.Farmers, insurance companies, and governments sign the insurance agreement together. This approach has been tried in the broiler and egg industry, but when product price is too low, the insurance companies have to pay more so they may continue losses, then the implementation effect is weakened greatly by the instability.

For the aquaculture industry, complement the futures in the chain can not only stabilize the market price, but also promote the development of industry in standards,so does other sectors." Said Huang Jin wen,CEO of China Data.He said, "China's commodity futures increased recent years , but compared with the international futures market,the species is still rare." For example, hog futures in livestock products, oil, natural gas, electricity futures in energy products which have connection with the entire market.But other important species like cement, rare Earth materials still don’t have futures.

Huang Jin wen expresses that the domestic livestock futures has not yet started,this situation is related to the status of domestic industries. The hog industry, for example, has a large proportion of small farmers,and the scale of farming is very small. Besides,the varieties are complex so the delivery standard is always in dispute. Moreover, there was an admixture of the genuine and the false in the Pig slaughtering industry,which may bring quality inspection of living hogs.However, these problems are gradually solved or being solved with the speed-up building of Scale and intensive management of domestic agriculture.In addition, we can also learn the design of the existing index futures contracts in foreign market, use the cash settlement to ensure consistance of the standards and safety of the food.

“For the state-owned enterprises, it may be more of an advantage to use options than futures and buying insurance."Introduction by Zheng Zhenlong,professor of Xiamen university.He said that buying options only suffers the loss of the premium, which can avoid greater losses on the disk. Meanwhile, the options market is perfectly competitive market, the premium may be much more fair than the insurance coast. He said that the volume of domestic commodity futures trading has reached a large scale, and the market is mature now, which can be the foundation to launch the tool options.

As for the soybean options in preparation currently , Huang Jin wen said soybean futures have been accepted by many feed and oil companies as the most active agricultural futures. Through attending the activities about investment holding by the futures companies and Futures Exchanges, many feed companies have certain understanding of the options using. In terms of information systems, the system of Exchange and the members both have been basically completed. Simulation trading goes well, and all conditions are relatively mature.

“Options are complex derivative instruments, it’s particularly important to design related system in accordance with the laws of the market." Zheng Zhenlong remembers that the market safety should be noticed first when designing the option system.Over radical is not allowed, but blindly emphasising on security and conservative is also undesirable.Against speculation in the market too much is not conductive to the market ecology.

11/04/2016

Low Productivity and Breeding Ban Handicap Future Hog Supply

China's Ministry of Agriculture held the press conference to release the current situation of hog production, and related policy at 10 a.m. on April 7.

Ye Zhenqin, the spokesman of Ministry of Agriculture said, the hog production has much improved compared to those of previous years. Sufficient productivity as well as better quality safety can meet consumers’ demand by a large. The transition of hog industry has achieved an initial success, and the amounts of small raising households joined industrial production of agriculture. However, there still exists many difficulties in China’s development on their underdeveloped livestock breeding, as for the rise in hog prices, “ There is such high profit of hog breeding recently that large hoggeries are more willing to add the livestock on hand, which provides a sufficient hog supply in near future.”Ye said.

Ma Youxiang, the director of Department of Animal Husbandry responded to some questions about hog breeding ban. “In recent years, bans and limits of hog breeding have reduced the hog productivity a lot”, he said. 10 provinces in China have launched or are preparing for the lay-out of banning areas from hog breeding, making an impact on more than 20 million pigs’ slaughter. As far as we know, many more provinces and regions are going to remove or ban the breeding of pigs and hogs, that will last long and expand nationwide. Hog productivity, indeed under great pressure now will benefit from it to keep the balance of supply and demand in the long run.

Ma also commented that the reduction of productivity in this hog cycle has been influenced by the breeding ban, but the hog price won’t spurt. First, the productivity is under recovery. Second, lower corn prices now save the breeding costs of hog. Third, there is a rarity of hog cholera or swine fever in China currently. Fourth, market demand declines as China’s economy has come into a new stage, in which consumption may help less to promote the macro economy than that before.

08/04/2016

China decided to strengthen and promote the productivity of superior corn producing areas, and to properly reduce the non-dominant planting areas, Ye Zhenqin, the spokesperson of China’s Ministry of Agriculture said on April 7. Considering the factors such as the resources endowment, ecological protection and market demand, the current and future structure adjustment of corn production is necessary in China.

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