A couple of years ago I was walking down one of the side streets in Piraeus and noticed the sign above a shop selling pies and other takeaway food called “Pink Pork”. So taken I was with this sign – native English speakers will probably understand why it amused me – I decided to take a picture of it. This action did not meet with the owner’s approval, and he came out angrily asking what the hell I was doing – Greek native speakers will understand some of the choice language he used – and when I replied I was taking a photo, he asked why and told me, not very politely, to desist. I could not understand his problem – it was a sign above a shop saying what the shop was called for all the world to read, but I dare say he had his reasons to be suspicious of an Englishman in a suit and tie taking photos of his business. Needless to say I didn’t buy any tyropittes.


Pigs feature heavily in my life it seems, one way or the other, and so it is without much apology that I return to the subject again. I have written before about how the study of fluctuating hog prices gave birth to study of economic cycles in the late nineteenth century, but now we seem to be seeing it played out in modern times.


To recap, African Swine Fever (ASF) ripped through herds in China, causing the premature slaughter and disposal of at least 130 million pigs in 2018-2019. This caused pork prices to go up, and limited the import of soy beans and corn, used as an animal feed. It also coincided with the Trump – China trade wars, when China was able to slap tariffs on US produced grain in the knowledge that combined with a lack of demand they would hurt the US more than they would hurt China. The herds have been replenished, and pork supply has been roaring back.


Now it goes without saying that pork is big business in China, so much so that now you can trade in hog futures on the Dalian Commodity Exchange. I suspect that they were introduced due to the price surges caused by the shortfall in supply over the last two or three years, to hedge the risk of buying and selling hogs in the future, but this has inevitably led to speculation, which causes its own volatility.


So what are we to make of the latest movements in both wholesale pork prices and futures? Wholesale prices have fallen almost 50% this year, the lowest prices since late 2019, and futures dropped on Tuesday as much as 7.1% in one day.

I like this graph very much, because it tells us a lot about wholesale pig prices but very little about anything else. It tells us that the price was very high in 2019-2021, but also very low in 2018. But the graph tells us a quick and easy story, i.e. the price was low, got high, and is now low again, in fact it is crashing! Or is it?


More information can be gleaned from an article in the Financial Times this week, which I suspect was following up (stealing from) a previous article from Bloomberg: one on the face of it:


–          ASF caused the widespread culling of pigs which reduced supply and sent prices racing up

–          Pork prices are falling now due to fears of oversupply

–          Farmers are sending their pigs to market early to try and cash in before prices fall lower

–          Fears of oversupply have been heightened by reports that some farmers have been fattening their pigs to between 300-400 kg (as opposed to their usual 200kg), which is basically the size of a small beef cow

–          The National Development and Reform Commission has issued a statement promising to “maintain supply and stabilize prices in the pork market” without actually telling anyone how they were going to do it


The quote I really liked was from Darin Freidrichs, at commodity analysts StoneX who said:


policymakers had hoped the introduction of futures contracts would help smooth out boom and bust cycles in Chinese pork prices. Now we’re in a bust cycle, so the volatility is still there.


The fact that policy makers thought that futures would smooth out boom and bust suggests that they have not been reading their basic economics, or this blog.


We know that the culling of pigs due to ASF caused under supply, which led to the rise in prices from other sources, but there could have been other factors at work as well; the other highly infectious disease floating around is not mentioned. We also don’t know why the price was zero in 2018. Furthermore we know very little – from the articles at least – about the supply, i.e. the number of pigs involved, only the price.


Let’s go back to basics. It takes some time to grow a pig to full weight, and when everyone grows pigs at the same time, even without boosting them to super-size, then everyone suffers from over supply at the same time. Then prices falls as everyone dumps their pigs on the market, large or small, and then they are reluctant to grow them again in such large numbers. This is what causes boom and bust. The corollary to shipping cycles I hope is obvious. Speculation on what prices will do in the future will only increase the peaks and prolong the troughs.


Digging back into a favourite named piggy website Pig Progress, tells me important information about pig numbers. In 2021, the herd is expected to grow by 19.2% reaching 613 million head. There are more pigs in China than there are people in the EU. There is about one pig for every two people in China. The Chinese will get through about 50 million tonnes of homegrown pork this year, also a 19% increase from 2020. But Pig Progress also tells me a slightly different story about the pork market in China.


According to Doctor Zhu Zengyong, chief analyst on pork trade under China’s Ministry of Agriculture and Rural Affairs (MARA):


–          There is a difference between the price paid for pork (slaughtered pigs) and that for medium to large live pigs for finishing. Farmers are still buying live pigs because they feel that the market will be better in the year, and prices for live pigs is stable

–          Production costs have increased recently due to the shortage of soy beans and corn. These prices are expected to ease as Chinese grown corn is harvested and the increased imports of grain reduce shortages

–          China is in fact importing large amounts of corn than normal to ensure that prices do not increase due to shortages

–          COVID-19 did affect pork consumption, but people are eating a lot more again


This is the best paragraph however:


… in 2022, the supply and demand of pigs will enter a basic balance, with the pig price fluctuating around RMB 18 (US$ 2.78)/kg. Then, after 2023, there will be an excess supply phase for 2 consecutive years and in the 2ndhalf of 2024, the market will enter a new price cycle.


Such confidence! Such precision! But also thankfully an awareness of basic hog economics that brings me back to the beginning as all good cycles do.


One of the reasons that the dry bulk shipping market is booming is because of corn imports to China, especially those from the United States. On all the evidence I have presented, this demand will continue, for some time. The Chinese government recognises and predicts the cycles of pig economics, so it should be fairly easy for farmers to predict how much corn they should grow, and therefore fairly easy for agricultural product traders to calculate how many ships they will need to book for cover over the next two to three years. What can they do to mitigate their freight costs?

Charter in ships for longer at less. How do they hedge it? Use FFAs.


There are signs, at least until today, that this is what is happening, and the numbers – and period – being offered is increasing. The effect on pricing is sending – theoretically if not practically – the values of very modern ships above the price of newbuildings. As yet, however, the number of newbuilding bulk carriers are being restricted by the reluctance of owners to order ships in the face of new environmental regulations. So good times for dry bulk owners for the next few years? Based on this reading, yes, even if pork prices are falling.


But just as pork – i.e. meat prices – is not the only story in the pig world, grain is not the only cargo in the dry bulk world. And one story about one price cycle of one commodity should not really be a guide for an owner wishing to buy a bulk carrier today. But leaving aside pigs, an agri-trader booking a ship for two to three years now means that a new market rate is booked, and the ship comes under different economic control, which changes the tonne-demand picture of both that ship and the rest of the dry bulk fleet, however subtly. This is a story that I am interested in, because it gives an insight into what other people may do.


Cycles, especially cycles in shipping, are so affected by things out of our control that we are normally reduced to hanging on to stories to express (and bolster) our confidence. I think pigs are a great story, but the real story is the lack of ships, and we can’t supersize them any time soon, or even breed them. Until this story changes, or until a black – or grey – swan flies into our vision, I suspect that the market will remain much the way it is.


Simon Ward