Chang'an Futures Liu Lin: Supply and demand exert pressure; futures and spot markets may remain under pressure

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1. Market Review

Due to futures trading at a premium over spot, and with spot performing weakly, since March, China’s hog futures have continued their downward trend. The benchmark LH2605 contract has fallen from around 11,150 to below 10,000, with the settlement price decline exceeding 13%. For far-month contracts after LH2607, they have had to give back the premium due to higher valuation; for the LH2607 contract, the settlement price decline also exceeded 10%. For subsequent contracts, due to ongoing expectations of capacity reduction, the decline decreases in sequence. On the spot side, under the backdrop of high inventory and excess production capacity, prices remain weak. National cull sow (marked pig) market prices have dropped from 10.8 yuan/kg to 9.38 yuan/kg, down about 13%. National fattened hog market prices have dropped from 11.56 yuan/kg to 10.03 yuan/kg, down about 8.91%. At present, the logic of a loose fundamental picture is still unfolding. If the near-month contracts led by LH2605 continue to run mainly based on fundamentals, the far-month futures’ trading logic may differ somewhat.

2. Fundamental Analysis

(1) Losses worsening, possibly forcing the industry to reduce capacity

Recently, spot prices have accelerated downward, and market sentiment has kept weakening. In Henan, cull sow exit-farm prices have fallen from 11.13 yuan/kg to 9.48 yuan/kg, a drop of about 1.65 yuan/kg (down 14.8%); fattened hog market prices have fallen from 11.9 yuan/kg to 10.3 yuan/kg, a drop of about 1.6 yuan/kg (down 13.4%). The rapid decline in spot prices has intensified losses in the breeding industry. Meanwhile, feed prices keep rising, further expanding losses. Even leading pig companies cannot escape financial tightness and have had to “increase capital” to “keep going.” Specifically, self-breeding and self-raising losses widened from 97.76 yuan/head to 310.56 yuan/head; purchasing piglets losses widened from 34 yuan/head to 201.99 yuan/head. Also, according to other institutions’ data, in the piglet-to-fattening model, average hog breeding losses have already exceeded 400 yuan per head. The entire industry has fallen into a deep-loss situation. Against this backdrop, market expectations are that capacity reduction may accelerate, but current hog slaughter still mainly increases.

(2) Existing hog supply is gradually slaughtered and released; in the short to medium term, market supply remains ample

On one hand, it is the inventory quantity of hogs available for release. The hog quantities available for release from March to April correspond to the number of sows capable of producing piglets