JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Shawn Hackett, President of Hackett Financial Advisors. Shawn, it's great to have you back on the show.
SHAWN HACKETT: It's really good to be back. We said we'd talk about African swine fever again, and here we are.
JAKE MERL: African swine fever, you've been covering this topic for the better part of the past year. You've been on Real Vision several different times talking about it, but just for the viewers that may not be familiar with the situation, can you please break down what exactly is going on with African swine fever and how it's affecting the global pork industry?
SHAWN HACKETT: Well, it's a disease and it impacts pigs. It causes sudden death within 10 days, and it's highly contagious. It can be found in food and water, and it just once it gets going, really, really hard to contain it. China got this disease last August. It spread almost every single province that they have, and it's caused 35% of their Hoggard to be slaughtered. That's just unheard of. We've never seen anything like that.
Because of that, we have this huge hole in the meat protein global supply chain. It's also spread to Vietnam, and most of Asia now is dealing with the problems of African swine fever. The issue not is there a problem? The issue is, what do we do about it? We're starting to see that proliferate with some skyrocketing pork prices and meat protein prices in China right now.
JAKE MERL: Is this problem getting worse? Is it getting better? You said the disease was actually spreading, what's going on right now?
SHAWN HACKETT: Well, it did get worse from the last time we were here. It has spread to all major Asian countries, especially Vietnam, which is a huge pork consumer. In terms of China, I won't say it's gotten any worse, it hasn't gotten any better. We're now in the recognition phase of them realizing the magnitude of the problem, and having to do something about it. Their imports of pork, their imports of chicken, their imports of beef are just skyrocketing, and there's really no way that's going to change for the foreseeable future until they can rebuild their herd, and hopefully find maybe a vaccine to never let this happen again.
JAKE MERL: This disease affects the price of pork, but you're saying there's also an effect with the supply and demand dynamics for chicken and beef as well. Can you talk about that, please?
SHAWN HACKETT: Well, there's the psychological part. The psychological part of I don't want to eat infected pork. Even though you say it's safe, I don't believe you, I'm just going to eat clean chicken, clean beef, clean fish, and I'll wait around for this problem to be solved. There's that part.
The other part is, there's not enough pork in the world for them to import to cover the gap. In order for them to actually fill the gap, they're going to have to reach out to other meat proteins to handle the total problem. It's an all in meat protein connectivity issue, not just pork.
JAKE MERL: This is a meat protein bull market in general, from pork to chicken to beef, and you actually recommended a few different ways to play the setup. You went long companies like JBS, Pilgrim's Pride, Australian Agricultural Company. How have these trades worked out over the past 6 to 12 months?
SHAWN HACKETT: JBS, we mentioned late in 2018 in our interview and it's more than tripled in value. I think it could go higher, but in terms of the value play, no longer something that I'm interested in. Pilgrim's Pride, which we talked about here in April, is already up 40% from when we were talking about it. Once again, I still think it could go a little higher, but probably not the best entry for it. Australian Agricultural Corporation really hasn't done anything. The drought is still ongoing there, which has hurt the company's performance, but I do believe it's still a good buy. I would continue to look at that as good investment going forward.
JAKE MERL: Would you say investors have missed the boat here? Is the party already ending, or do you think there's room to run with some of these names?
SHAWN HACKETT: Well, you certainly missed the early part of the party. As they always say, you don't want to be the last one to leave. I don't think we're at that point yet. I think we're still in the middle part of the party, where there's still opportunities, there's still things to be done, there's still value to be had, but a little differently, a little further on the chain than what we originally discussing when we first talked about this.
JAKE MERL: How do you suggest traders and investors play the current setup?
SHAWN HACKETT: Well, we've had this massive bifurcation with international price, Chinese price, and the US price. Right now, we've seen pork prices in China literally go parabolic to the highest levels in history. The US pork price has been absolutely crushed, crushed, going from 90 cents a pound down to 60 cents a pound, mainly because of the breakdown of the China trade war, or negotiations in May, and the escalation of the trade war.
Then the Chinese coming out and say that we're encouraging no one to buy US agriculture right now until we get resolved. Because of that, they pulled back on buying US pork and so we have this huge dislocation. It can't last, it won't last so there's an opportunity there. We think that's one interesting pocket of value that is enveloped here in the last 3 or 4 months that we think one should be able to participate and do well with.
JAKE MERL: Would you be shorting Chinese pork, going long US pork? How do you take advantage of that opportunity?
SHAWN HACKETT: Unfortunately, there's no futures market in China to do that with, and we're reticent to really go long futures and stuff, because as we talked about before, what if African swine fever was found in the United States. We just don't want to be in a position to be in a leveraged investment with that risk out there.
Having said that, we do think there's an interesting way to play this with a company called Seaboard, S-E-B is the symbol, trades in the New York Stock Exchange. It's a 100-year-old company. They're the second largest pig producer in the United States and the fourth largest processor in the United States. If you lay a chart of Seaboard stock price against the futures price of Hogs, there's a very high correlation of how those two markets run together or run back and forth to each other.
We think that that is a very interesting way to play this current depressed US price to owning Seaboard, $6 billion company, pays a nice dividend, pristine balance sheet. They have other businesses in marine transport. There's other things going on here and we think this is a lower risk way to play a big rebound in US prices when eventually demand comes back to fill this pork protein hole that we've been talking about.
JAKE MERL: In terms of the actual stock price, how much upside are you expecting?
SHAWN HACKETT: Well, right now, if you look at the chart, we've had this quadruple top that we developed. We think that on this next run higher import prices, we're going to break through that level, and really make old time highs in the stock. We think the stock can run up to $6,000. Yes, $6,000 per share. It's one of those higher price stocks, but we think that's a pretty good target price from where we are now around $4,000, $4,200 is where we are right now.
JAKE MERL: What would you say is the biggest risks that trade? Is it simply the fact that African swine fever could come here to the United States?
SHAWN HACKETT: I would say that really is your biggest risk, really biggest systemic risk. Yes, the economy could go bad. Yes, the China trade war could continue, but that's already priced in in our view, but if we do find African swine fever in our shores, Seaboard's going to get hit.
JAKE MERL: In addition to playing the pork prices here in the United States, are there any other ways you suggest traders to play the current setup?
SHAWN HACKETT: There's an opportunity a little further into the cycle and what it is, is because bean meal demand in China is down. Because if you have 35% less pigs to feed, you have less need for bean meal, which is a huge component. That means that you're crushing less soybeans to make meal, but the other component of crushing soybeans is soybean oil. By the very nature, that bean meal demand is going down and less crushes going on means that bean oil supplies are falling as a result, yet demand in China and in India and globally, is making record highs by the day.
What we call the stocks, the amount of oil that's out there, relative to the demand for that product is actually at the lowest level since 1993. We don't see that trend going away until they start crushing more beans, or finding some other ways to make palm oil or some of the other edible oils that out there. We think we have a situation where this proliferation of African swine fever has gotten now to the point where this trade is now in play.
JAKE MERL: How do you take advantage of that situation?
SHAWN HACKETT: We think that the best way to do it is to own a large producer, plantation owner of edible oils, and processor. One of our favorites is a company called Wilmar International. $50 billion company, just a dominant, dominant company. I think they're the second largest palm oil plantation owner and dominant processor of bean oil into beans and such forth and so on. Once again, if you lay their chart over the chart of palm oil prices and bean oil prices, there's a very high correlation meaning that the stock price is pretty well leveraged to the price of that.
Palm oil has been hit very, very hard over the last 12 months and we made what it looks to be a double bottom pattern. It looks like we're just about ready to complete that bottom. We feel that that's likely going to happen and as it does, the Wilmar chart also looks like once again, about a quadruple top, developing bottoming pattern. Both charts look very similar that we're looking for an important breakout, which would be looking for all upside here.
If you look at where Wilmar has gone before, we think there could be a 50% up in the stock. We're thinking the back half of 2020, that may take a little time for this to develop, but we think there's plenty of upside in this stock over the next 12 months.
JAKE MERL: What would you say is the biggest risk to that thesis?
SHAWN HACKETT: I would say the biggest risk to that thesis is really the economy. Bean oil is something that's used in baking and frying. There is an economic component to it in terms of restaurant, health, and how the restaurants are doing and so if there was an overall-- really, let's say, a crash in Asian economies and where India and China are just starting to use less of the product, that could be the biggest risk that we see in the stock.
JAKE MERL: Well, Shawn, thanks so much for joining us. It was great having you back on the show. Thanks so much for the update.
SHAWN HACKETT: My pleasure. I look forward to do it again.
JAKE MERL: Shawn is still bullish on meat protein. Specifically, he likes buying Seaboard Corporation, ticker symbol SEB, at current levels. He thinks the stock could hit $6,000 over the next 12 months. In addition, Shawn is also bullish on Wilmar International, ticker symbol WLMIY. He thinks the stock could go as high as $40 over the next 12 months.
That was Shawn Hackett of Hackett Financial Advisors and for Real Vision, I'm Jake Merl.