China hog prices firm, cold meat imports bring covid risk

More bad news for global fertilizer users
The global fertilizer market can’t catch a break. Fertilizer producer Hubei Yihua announced Tuesday evening China time that due to limited supply of natural gas during the winter they were temporarily shutting down production at a facility with production capacity of 300,000 tons of ammonia and 520,000 tons of urea. Zhengzhou’s urea futures were up slightly on Wednesday but are down 30% from their high set less than two months ago.

Even with this price pullback, futures are up 37% YoY. Fertilizer production is incredibly energy intensive and prices spiked during the autumn power shortages. China’s National Development and Reform Commission has met with many fertilizer producers, and while there aren’t any official export restrictions in place, several firms have said they are prioritizing supplies in the domestic market.

This is sending shockwaves through global fertilizer markets as China remains a major fertilizer exporter despite Russia recently taking over as the largest exporting country and represented 16% of global nitrogen fertilizer exports in 2020.

One of the reasons China wants to keep fertilizer in the domestic market is because there are increasing worries about food security as the pandemic continues to wreak havoc on global supply chains.

Moreover, farmers in China have much less land than their counterparts in North America, South America, and Europe. Meanwhile, technologies and economies of scale in China are also behind their American and European counterparts. China also doesn’t allow GMO seeds which limits the yield gains which would be otherwise available through better seed technology. This leaves fertilizer applications as one of the main ways to keep yields and production growing.

The futures industry benefits more from commodity prices volatility
Futures trading continues to grow in China as the volatility in markets has increased. The China Futures Industry Association reports that November volume totaled 705.7 million lots, up 10.2% YoY, representing a gross notional value of 50.8 trillion yuan in the same month, up 9.24% on the year. On a month-on-month basis, growth in volume surged 13% and growth in notional value jumped 6%.

Hog prices continue to firm, but for how much longer?
Live hog prices in China moved higher in November this year, with the average price of 16.28 yuan/kg on November 1. The 30-day average price was 17.88 yuan/kg, meaning an increase of 9.83% during the month. Starting December, national average cash prices hit 18.05 yuan/mt. Hog futures continues to be rangebound, going sideways between 15.8 and 16.95 yuan/kg throughout November this year. China’s Ministry of Agriculture also said substantial price increases were likely but prices are currently at a relatively reasonable level. The current rally in prices seems mostly consumption-driven as there is typically higher seasonal demand into the winter and ahead of the Chinese New Year holiday.

Cold chain meat imports remain a source of risk
Imported cold chain products continue to face coronavirus-related scrutiny. China Customs announced that an Argentine seafood supplier was suspended on November 30 after coronavirus was detected on the packaging of import shrimp. This follows an Indian company being suspended on the 26th of the same month when the virus was found on the packaging of fish. The concern about coronavirus being transmitted on frozen foods has also seemed to lead to an increase in anti-smuggling enforcement. There has always been an active “grey market” for beef smuggled in from places like Vietnam or Hong Kong. Recently Qinzhou, a city about 50 miles from Vietnam, started an anti-smuggling campaign and reported seizing of 27.7 metric tons of frozen beef smuggled in mostly via boats.

Stronger currency supports importers
The Chinese renminbi continues to rally against the US Dollar and hit intraday highs of CNY6.36 per dollar Wednesday morning China time before retreating slightly. The yearly high for the exchange rate was CNY6.3573 per dollar set back in May 2021. If the currency gets above this level, it would be back into multi-year highs not seen since 2018. This strength comes after a rebound in China’s PMI for November, and a broader global selloff due to the new covid omicron variant.