The Hog Report by viclub10

This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither MHI nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of MHI/Virtual Investing Club. Copyright(c) 2007. All rights reserved

This REPORT is brought to you by: The Virtual Investing Club www.virtualinvestingclub.com By Shane Rawlings 3/3/2008 As I write this report the price of lean hog futures sits near a 20 year low of 58 cents per pound. Production was up over 4% in 2007 and estimates show 2008 production increasing by 4%-5%. One might ask, if this is the case, why am I turning bullish on the price of lean hogs? That is certainly a valid question, and one I will attempt to answer throughout this report. At the end of the report I will discuss what I believe are the best ways to take advantage of rising lean hog (pork) prices without trading the futures contract. China is currently the world’s largest pork producer. According to the China Feed Industry Association, they raise over 530 million hogs each year compared to approximately 100 million in the US. For millennia , pork has been a staple of the Chinese diet and culture. So important in fact, that some have paralleled it with the US's affinity for oil. The Chinese government even maintains an “emergency pork reserve” much like America's strategic petroleum reserve. This reserve is released onto the market in times of crisis. With over two decades of rapid economic expansion, pork demand in China is on the rise. In 2007 alone GDP grew by 11.4 per cent which truly is mind-boggling. This kind of growth is catapulting record numbers of Chinese consumers out of dire poverty and into a “middle class” status which has caused meat consumption in China to more than double over the last 20 years. According to the Economist, in 1985 the average Chinese consumer at 20kg (44lb) of meat each year; now he eats more than 50kg (110lb) with 65% of that being made up of pork. As impressive as the growth in China has been, the majority of the growth has been limited to the east coast. Now China is getting ready for phase 2 of its major build-out where they will spend some 400 billion dollars connecting rural China, which makes up about 90 per cent of the population, with the booming east coast. While 18% of the Chinese diet, in the wealthier urban parts of China, consist of pork, only 6% of the rural diet is made up of pork. As the Chinese “super boom” continues, hundreds of millions of “new” Chinese people will see a dramatic rise in their standard of living. As the living conditions and income of these rural consumers increase, pork consumption in China will go ballistic. Jing Ulrich, JP Morgan's chairman of Chinese equities, opines that most countries experience an even more dramatic shift toward a meat diet when per capita income reaches $3,000. China's is currently $2,616 – forecasting an even greater pork demand in the future. Historically, China has never had a need to import pork from the US. However, there are several market dynamics at work right now that I believe will eventually force China to start importing large amounts of pork from the US. This in turn will put huge upward pressure on the price of lean hogs here at home. You may already be aware; in 2007 a crisis hit the Chinese pork market when a virus, believed to be blue-ear disease, began ravishing their hog market. So far, the disease has spread to 25 of the 33 provinces and regions located in China and has infected hundreds of thousands of swine. That may not sound like a lot, but when you consider they already lose 25 to 30 million hogs each year under normal circumstances, it begins to add up.

International health experts are calling it one of the worst disease outbreaks ever to hit Asia's livestock industry. Many experts believe the situation could worsen due to a farming industry that has rapidly been changing into a US style system of consolidated farms. There is even talk that the fast-mutation pathogens could spread to neighboring countries, igniting a worldwide epidemic that could affect pork supplies everywhere. The recent outbreak, rising feed costs, and severe winter conditions which have made it very difficult to get hogs to market, have devastated many small farmers causing them to give up on raising hogs altogether. Supplies have now dropped by 10% after an already poor production year in 2006. This has caused a pork shortage throughout the country sending prices higher by 85% and igniting the worst inflation in more than a decade. As bad as this outbreak sounds, a far greater problem faces the Chinese pork industry. How to feed their domestic hog market. The primary food crop for feeding hogs is corn, and it takes 4 kilograms of grains to produce 1 kilogram of meat. Even though China is the second largest corn producer next to America, the US and Iowa (US corn-belt) have a comparative advantage in growing corn. US yields are double those of Chinese crops and production costs in China are higher as well. China only has 7% of the worlds arable land and must feed 13 people for each hectare of arable land, whereas Europe must feed 4.1 people, and the United States only 1.4 persons. The lack of arable land makes in next to impossible for China to increase their annual corn production. In 2006 total cropland dropped to 120 million hectares which is the minimum benchmark necessary to sustain food security in China. When you consider the rapid growth of the Chinese “middle class”, and that the population is expected to grow by another 100 million people in the next 20 years, you begin to see the dire situation in which China currently finds itself. Some industry experts feel it a safe bet that China will soon become a net importer of corn. Countries that import feed grains must pay a premium over world market prices. Pork producers in Japan and Taiwan, for example, pay about twice as much for feed as pork producers in Iowa. Corn prices here in the US are now at 12-year highs thanks to the ethanol “hoax” which isn't going away anytime soon. What's worse, with large government subsidies ethanol producers can still turn a profit even with corn at $5 a bushel. $5 a bushel corn, that immediately doubles to $10 when it is imported by China, could make the world's largest pork industry (China) uncompetitive with imported pork products that can be fed and raised much cheaper here in the US. This suggest the price of lean hogs here in the US could rise substantially in the near future as a nation of 1.3 billion people are unable to raise enough pigs domestically to satiate its enormous appetite for pork. The price rise could be substantial considering the US hog market is less than 1/5th of the total hogs consumed each year in China. In September of 2007, China struck a deal with American pork producer, Smithfield Foods to import 60 million pounds of pork to help offset recent poor production. This is a relatively small deal, but represents a huge milestone. US pork producers now have a foot in the door to penetrate the Chinese pork market and create greater growth opportunities. There has also been strong export growth of US pork to both South Korea and Russia. It is my belief that market forces will push China toward importing increasing amounts of pork in the years ahead, which could create an unprecedented investment opportunity in the US lean hog market.

Chart reprinted permission Trade Station www.tradestation.com

The above chart shows 20 plus years of price history for lean hogs. Based in my interpretation of the technical picture, specifically the Elliott Wave corrective pattern, I believe a significant top in the price of lean hogs occurred in 1996, around $1.10 a lb. Since then prices have chopped back and forth in a range between $0.58 cents and $1.10 a lb. Price is once again trading near the low end of that range and completing what I believe is the C leg of a very large ABC correction. If the correction isn't over yet, my opinion is that it soon will be and lean hogs will commence a new bull market that could easily last for the next 5 to 7 years and take prices as high as $1.35 per lb at a minimum and possibly much much higher.

SFD

SMITHFIELD FOODS Sector: Consumer Goods Sub-Industry: Meat Products

Business Description Smithfield Foods, Inc., together with its subsidiaries, engages in production of hog, and processing of pork and beef worldwide. The company offers fresh pork products, including unprocessed and trimmed cuts, such as loins, picnics, and ribs; and packaged meats products, such as smoked and boiled hams, bacon, sausage, hot dogs, deli and luncheon meats, pepperoni, dry meat products, and ready-to-eat foods. It also offers beef products, which comprise boxed beef and ground beef. Smithfield Foods also involves in turkey production and hatchery operations. The company sells its products to supermarket chains; wholesale distributors; export markets; other further processors; foodservice industry, such as fast food, restaurant, and hotel chains; hospitals; and other institutional customers. Smithfield Foods markets its products through its sales force and through independent commission brokers. The company was founded in 1961 and is based in Smithfield, Virginia.

Fundamentals

The company has a trailing P/E of 20.50 which is in line with the industry standard. The price-to-book value is 1.26 compared to an industry standard of 4.00 indicating the company is trading at a discount. The company has grown it's revenue over the trailing twelve months at 17.82% which is 31% faster than the industry standard of 13.57%. Insiders own 12.84% of the company, indicating substantial vested interest among those most closely tied to the business.

Rating-

BUY

Weekly Chart

Chart reprinted permission Qcharts www.quote.com

Chart and Trend Analysis Also of technical interest is the fact that each time the stock has pulled back to the key moving averages on the monthly chart above price has found support and then continued its bullish trend higher. We believe the most recent pullback to these key moving averages is providing and excellent low risk entry opportunity before the stock resumes its march higher.

Entry Price Initial Stop Price Initial Price Target Hold Time

Current market price 30% Trailing Stop $40.00 6-18 Months Allocate up to 4% of capital

FEED

AgFeeD INDUSTRIES, INC Sector: Consumer Goods Sub-Industry: Processed & Packaged Goods

Business Description

Rating-

BUY

Daily Chart

AgFeed Industries, Inc., through its subsidiaries, engages in the research and development, manufacture, marketing, and sale of fodder and blended feed for domestic animal husbandry markets in the People's Republic of China. Its products primarily includes pre-mix fodder that is designed for use in all stages of a pig's life; and blended feeds, which is used for the infant stage of a pig's life. The company also produces piglet blended feed to nourish and protect newborns. It offers its products primarily to distributors, large scale pig farms, and husbandry farms. The company was founded in 1995 and is headquartered in Nan Chang City, the People's Republic of China. Chart reprinted permission Qcharts www.quote.com

Chart and Trend Analysis Fundamentals

AgFeed is a small company with a market cap of only 287 million. They are a strong growth company boasting a 3-year revenue growth rate of 90% and a 3-year earnings per share growth rate of 132%. The ROE is 42.11% and the company has 10 million in cash with only 1.72 million in debt.

The technical picture is also very promising. It appears, over the last five months, the company has been forming a very constructive cup with handle pattern and could be getting ready to break out above its pivot point (around $12.00) any time.

Entry Price Initial Stop Price Initial Price Target Hold Time

Current market price 30% Trailing Stop $12.00 6-18 Months Allocate up to 4% of capital