Three items are on the front burner of the U.S. hog market as we approach the peak fall hog runs. These are Hurricane Florence, North American Free Trade Agreement talks with Canada and the spread of African swine fever in China. The hurricane and the huge mess it created in its wake should be considered a short-term fundamental development whereas the NAFTA talks and ASF in China are both long-term fundamental developments.

Florence caused the largest pork producer in the United States, Smithfield Foods, to completely shut down slaughter operations for nearly two weeks. The major disruption in the slaughter and production, approximately 10%, has caused an impressive rally in cash hog prices. Last week alone, the week following the hurricane, cash prices jumped by $11 per hundredweight. The cash market appeared to have bottomed before the hurricane hit but the disruption in the kill and resulting appreciation in product values caused cash bids to soar. Smithfield has yet to be back on track with a full kill schedule. This should happen sometime in the coming week.

In the meantime, having hogs backed up is solely a Smithfield issue. The rest of the industry has been pulling hogs ahead, taking the cue from the sharply higher bids offered for butchers. Average hog weights have been declining. It may take Smithfield several weeks, as many as six weeks to get their backlog caught up.

The second fundamental development, the NAFTA talks, are expected to wrap up with an agreement by the end of September. At least that’s what I’m anticipating. Simply looking at where the most economic pressure resides, and this should indicate who will ultimately bend to reach an agreement. Given the fact that 75% of Canadian exports come to the United States, they’ll likely have to be the ones to bend and give in to the demands of the current negotiations. Simply put, Canada needs the agreement more than the United States does. A NAFTA agreement will definitely represent a positive long-term fundamental development for both U.S. pork producers and beef producers.

The third fundamental development, ASF in China represents a major if not huge long-term development impacting U.S. hog prices in the weeks and very possibly months to come. In two months there have been 23 cases reported in eight different provinces. Two new cases announced last Friday occurred in two new provinces, clear evidence that the disease is spreading. Because of the nature of pig farming in China, the control of this disease represents a horrible challenge. In China only 18% of the pigs reside in large hog farms, those farms containing more than 10,000 pigs marketed per year. Which is to say that 82% of the pigs in China are located on smaller farms that market far less than 10,000 per year. In fact, 42% of the pigs reside on small farms that market fewer than 500 pigs per year. Controlling the spread and containment under these conditions will likely prove nearly impossible. Indeed, it’s highly possible they may be fighting this disease for years.

Thus far the official statement from the Chinese government indicates 40,500 pigs have been culled to date. Most likely the number is far greater. The problem is we’re likely only hearing a fraction of the story as they battle this disease. Listed below are the facts regarding pork production and consumption in China as we know them.

• China has upwards of 430 million to 450 million pigs.

• The Chinese pig population is more than half the pigs in the entire world.

• The USDA estimates there are 44 million sows in China.

• China is a net pork importer. They consume far more pork than they raise.

• Thus, every pig that is culled in China represents a carcass that must be imported.

• If they have to cull sows, then the math on future imports expands greatly.

• The Chinese consume more pork than the rest of the world combined.

These central facts tend to demonstrate that the world in regard to pork supply and demand is on the verge of seeing major changes. Simply put, if China is forced to cull millions of pigs as they attempt to contain ASF, there will not be enough pork in the world. The manner in which markets ration tight supplies, of course, is by increasing prices substantially.

Indeed, consider that this is, by far, the biggest story to hit the hog market since the porcine epidemic diarrhea year of 2014. That winter it is estimated that from 6 million to 8 million pigs died. The resulting price rally is easily identified. That spring April lean hog futures soared to $125 and by early summer June futures moved past $130. As I recall the onset of PED mostly resulted in deaths of baby pigs and did not cause any culling of breeding stock. As the Chinese fight ASF, large culling of breeding stock is a strong possibility. If this occurs, the situation is amplified dramatically in regard to future demand/import needs.

The main suppliers of pork to China are the European Union, Canada and the United States. Currently Canada exports nearly 70% of the pork they produce, so their ability to expand pork exports is severely limited. Thus, the demand shift will primarily hit the European Union and the U.S. hog producers. Brazil also exports some pork.

The difficult part moving forward is the likelihood that the Chinese will not be sharing information freely as they attempt to contain this disease. As they begin importing pork it will become evident through the product pipeline, cutout values and packer behavior. In other words, cutout values will move higher and cash bids will also surge upward. Weekly export data will help to identify when large Chinese buying surfaces. Of course, complicating matters is the current trade war and current Chinese tariff on U.S. pork. Make no mistake, if an acute shortage of pork develops in China, they will drop the tariff in an instant. Several years ago, the Chinese purchased Smithfield Foods just for this reason. Not only will they drop the tariff, but they’ll quickly relax current restrictions on U.S. pork which includes the requirement for ractopamine-free pork. The Chinese government will not allow pork prices to soar in China. Everything else — tariffs, restrictions and price — will become secondary.

The USDA will issue their quarterly Hogs and Pigs report on Sept. 27. This will outline the hog inventory situation in the United States as of Sept. 1. Despite the decline of cash hog prices to nearly 16-year lows in August, we’re not expecting to see any hint or evidence of contraction. In fact, most are expecting some expansion to be noted on the upcoming report. However, in light of the developing stories of NAFTA and ASF, in my opinion it would take a rather dramatic supply shock to send hog futures sharply lower in the wake of the report.

Finally, as bullish a story as ASF represents for U.S. hog producers, the spread of this disease represents a major problem down the road.