Contracts, Insurance, and Risk Management Oh my! - What can you do to protect yourself, your farm, and your pigs from disasters? - Chris Pudenz, Iowa State University, from the 2020 Iowa Pork Congress, held January 22 - 23, 2020, Des Moines, IA, USA.

1. Modeling the Predicted Probability of an
ASF Outbreak in the United States
Christopher Pudenz
Department of Economics
Iowa State University
Iowa Pork Congress 2020
Des Moines, IA
January 23, 2020

2. Roadmap
1. Background
2. Data
3. Results
4. Implications
Pudenz (2020) 1

3. 1. Background
• August 2018: ASF
outbreak reported in
China
• Since documented in 32
provinces (FAO 2019)
• Inventory (hogs and
sows) dropped 40% from
Oct. ‘18 – Oct. ’19
(Bloomberg News 2019)
Pudenz (2020) 2
(Inton et al. 2019)

4. 1. Background
• How have U.S. agricultural markets responded?
• CME lean hog futures market
• CME lean hog options market
Pudenz (2020) 3

5. 1. Background
Pudenz (2020) 4
(Data: Barchart.com)

6. 1. Background
Pudenz (2020) 5
(Data: Barchart.com)

7. 1. Background
• Spring 2019
• March 14, 2019: USDA announces that China purchased 24,000 metric tons of
pork from the United States in the week ending March 7 (Polansek 2019a)
• March 15, 2019: U.S. Customs and Border Protection announces seizure of 1
million pounds of illegally imported food products from China (Polansek
2019b)
Pudenz (2020) 6

8. 1. Background
• Question:
• What does the lean hog futures market response to the ongoing
outbreak of ASF in China tell us about the change in the perceived
probability of an ASF outbreak occurring in the United States?
Pudenz (2020) 7

9. Roadmap
1. Motivation and Research Question
2. Data
3. Results
4. Future Research
Pudenz (2020) 8

10. 2. Data
Pudenz (2020) 9
(Data: Barchart.com)

11. 2. Data
Pudenz (2020) 10
(Data: Barchart.com)

12. Roadmap
1. Background
2. Data
3. Results
4. Implications
Pudenz (2020) 11

13. 3. Results
Pudenz (2020) 12

14. 3. Results
Pudenz (2020) 13
• Perceived probability of an ASF outbreak ($40/cwt Floor)
• March 1, 2019: 1.05%
• March 15, 2019: 2.37%
• April 1, 2019: 4.38%
• April 15, 2019: 2.67%
• Summary
• Modeled ASF outbreak probability increased substantially in
response to ASF outbreak in China

15. Roadmap
1. Background
2. Data
3. Results
4. Implications
Pudenz (2020) 14

16. 4. Implications
Pudenz (2020) 15
• Risk Management Using Options
Date June ’19 Lean Hog
Futures Price
($/cwt)
Premium for
$10/cwt out of
the money put
option ($/cwt)
Premium for
$66/cwt put
option ($/cwt)
3/1/2019 75.525 1.00 1.00
3/15/2018 86.525 2.25 0.425
4/1/2019 88.50 2.175 0.35
4/15/2019 98.30 2.425 0.15
(Data: Barchart.com)

17. 4. Implications
Pudenz (2020) 16
• Risk Management Using Options
Date June ’19 Lean Hog
Futures Price
($/cwt)
Cost for $10/cwt
out of the money
put option
($/pig)
Cost for $66/cwt
put option
($/pig)
3/1/2019 75.525 2.00 2.00
3/15/2018 86.525 4.50 0.85
4/1/2019 88.50 4.35 0.70
4/15/2019 98.30 4.85 0.30
Note: Calculation assumes lean hog carcass weight of 200 pounds and omits brokerage commission
(Data: Barchart.com)

18. Thank you!
Questions?
Pudenz (2020) 17

19. References
Bloomberg News. 2019. “China’s Hog Herds Plunge More Than 40%, But Worst May Be Over.” 2019. Bloomberg. Available online at:
https://www.bloomberg.com/news/articles/2019-11-29/china-s-hog-herds-extend-plunge-amid-signs-worst-may-be-over (accessed on December 1, 2019).
Food and Agriculture Organization of the United Nations (FAO). 2019. “ASF situation in Asia update.” FAO. Available online at:
http://www.fao.org/ag/againfo/programmes/en/empres/ASF/Situation_update.html (accessed on December 1, 2019).
Inton, C., W. Cai, H. Huang, and D. Patton. 2019. “African Swine Fever: China’s pig industry crisis.” Reuters. Available online at: https://graphics.reuters.com/CHINA-
SWINEFEVER-FARMERS/010090DR0KM/index.html (accessed on December 2, 2019).
Polansek, T. 2019a. “China makes major U.S. pork purchase despite steep import tariffs, as hog virus takes toll.” Reuters. Available online at:
https://www.reuters.com/article/us-usa-china-trade-pork/china-makes-major-u-s-pork-purchase-despite-steep-import-tariffs-as-hog-virus-takes-toll-idUSKCN1QV2MR
(accessed on December 18, 2019).
Polansek, T. 2019b. “U.S. Customs details China pork seizure; importers could pay fine.” Reuters. Available online at: https://www.reuters.com/article/us-usa-
swinefever/u-s-customs-details-china-pork-seizure-importers-could-pay-fine-idUSKCN1R32GS (accessed on December 1, 2019).
Pudenz (2020) 18