African Swine Fever (ASF) is having an immense impact on Chinese and Vietnam pork production as producers are forced to cull infected hogs to attempt to constrain the spread of disease.
It’s shaping up to be a black swan type event in commodity markets and a boon for US pork producers provided the disease doesn’t make it to the shores of North America.
This week the US lean hog futures market is finally waking up to just how serious the long-term structural impacts are for global meat and feed markets.
The Chinese hog population represents an incredible 55% of the total hog population globally. The highly infectious disease is now found in all provinces in China and rumours are circulating on just how many hogs are being slaughtered. Some estimates are as much as 25% of the Chinese herd could be slaughtered due to the disease as the number of infection cases skyrockets.
When dealing with China, it is always difficult to ascertain what's happening on the ground. Making matters worse is that the Chinese Government appear to be covering up the true extent of the issue.
At Imbue Capital, we combine our deep fundamental domain expertise of global commodity markets and leverage the power of big data with sophisticated AI technology.
It means we use insightful alternative data at an enormous scale to be several steps ahead of the market. It is, but not limited to, large datasets such as weather, satellite, news sentiment, social sentiment and google search data.
What has been interesting of late, is that despite the clear ASF issues in Asia, and the potential for China to now turn to the US to import its significant pork needs, the US lean hog futures market has nonchalantly dismissed the issue been under pressure until this week.
Hedge funds have been caught short here, providing the prime environment for an aggressive short squeeze.
We’ve seen it differently using alternative data.
We've seen a rise in news articles related to ASF. That means that awareness of the issue is building and behavioural literature would suggest that is then incorporated in to market values. Literature also suggests that these events can often see an overreaction when first incorporated in to the market, which aligns with the violent moves that we have seen to the upside as hedge funds unwind their bearish bets.
We've also seen an explosion in Google searches related to ASF in countries such as Vietnam that suggests that the problem is only getting worse (see below).
For those interested in trading or investing in commodity markets, that may be a great non-traditional way to keep track of the ongoing ASF event.
The below chart represents the number of Google searches in Vietnam for "African Swine Fever Virus".
You can also track Google searches at the city or regional level. In the US, the largest volume of searches for "African swine fever virus" is emanating from key hog producing regions in the US Midwest. If we were to see an explosion in searches in the US, perhaps it could be a leading indicator that the virus has made it to US shores which could be bearish the front of the futures curve with nearby supply ballooning and bullish the long dated commodities as a shortage develops. Something to keep an eye on....
Furthermore, a US-Chinese trade deal would only improve sentiment for livestock commodity markets.
Search data on China-US relations as a topic is declining globally, perhaps it suggests we're all growing tired of dealing with the headlines. Interestingly, market reactions to positive trade progress negotiations have diminished over time. It feels a bit like the boy who cried wolf at the moment until we have more concrete indications.
China remains the largest by volume, which may infer that the public are under pressure as economic impacts are felt and looking to learn more about ongoing negotiations.
I hope that this article has been insightful. Alternative data can be a fantastic resource if you know where to look. I'd recommend taking a look at Google Trends as one avenue in to the world of alternative data.
At Imbue Capital, using alternative data is a foundational aspect of what we do, by harnessing insights in complex big data sets to derive insights to trade international commodity markets for our clients. If you'd like to learn more, please don't hesitate to reach out here on Linkedin or via our website.