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AHDB Pig Market Weekly

11 March 2016

AHDB Pig Market Weekly - 11 March 2016AHDB Pig Market Weekly - 11 March 2016


Cost of production falls but margins still negative

The cost of pig production in GB fell by 4p/kg in the final quarter of 2015, to an estimated 135p/kg. This is the lowest level since early 2010, as falling feed prices combined with improved productivity and feed efficiency to reduce costs. Nevertheless, with the pig price (APP) falling by 6p/kg from the previous quarter, to 130p/kg, producers lost an average of 5p/kg (or £4/head) during the three months. This continued the trend of most of 2015, with producers making small losses on a full economic cost basis.

Once non-cash costs, such as depreciation and family labour, are taken into account, most producers will still have been making a cash profit in late 2015. However, the latest figures confirm that the situation is likely to have changed for many in early 2016. With feed prices relatively stable so far this year, production costs are likely to have remained at a similar level. However, pig prices have fallen sharply, taking producer losses up to around 20p/kg (£16 per pig). This is a large enough margin to mean a cash loss, which will likely be enough to push some producers out of the industry. There are already signs of this in sow slaughtering estimates, with numbers 17% higher than a year earlier in the first six weeks of 2016.

English breeding herd largely stable in December
Defra figures from the 1 December 2015 pig survey show a surprising decline in the total pig herd, with reported numbers falling 4% to 3.53 million head. This is the first time since 2012 that Defra have stated a fall in the total pig numbers in their December census. This apparent decrease in the total pig herd comes over a period where slaughterings were up on the year, having been up 4% to 10.6 million head in 2015. Therefore, this raises the question of how a reported diminishing pig herd has been able to support increased supply. The figures would suggest that production levels may decrease in the first half of 2016 but to date the reverse of this has been true, even though over half the feeding pigs at the start of December should have been finished by now.

However, the breeding herd is reported to have remained largely stable at 317,000 head, a 1% increase on a year earlier. Of this, while the number of in-pig sows increased 5% to 220,000 head, the number of in-pig gilts decreased significantly and the number of maiden gilts increased. This would suggest that, while the breeding herd was yet to see any rationalisation by 1 December 2015, producers may have been delaying serving some of their maiden gilts. The UK pig price has continued to fall significantly following the census date, so we would expect that some of the breeding herd may have come forwards to slaughter since then, to tighten supplies later on in 2016.

UK pig prices
The EU-spec SPP largely stood on for the second consecutive week, falling a very modest 0.05p to 112.12p/kg in the week ending 5 March 2016. With this being the fourth consecutive week of only moderate declines and reports of the spot price remaining stable, it could now be hoped that the bottom of the market has been reached, especially given the run up to the Easter holiday period.

The average carcase weight fell slightly once again to 83.8kg, down 0.1kg on the previous week. The average probe measurement remained at 11.2mm, the lowest level seen since September 2015. This suggests that finishers are becoming leaner and the colder snap may have led to a slight brake in the growing conditions. Estimated slaughterings rose 3% to 183,000 head for the week ending 5 March 2016, making them 8% up on the same period a year earlier. Reports stated that very few pigs were moved out of contract, suggesting contract demand may be starting to increase slightly.

The EU-spec APP fell by 0.48p to 115.83p/kg for the week ending 27 February 2016, narrowing the gap between the APP and SPP, which remained under 4p. This means that the price remained around 21p lower than a year before, with the market falling at a similar rate this time last year.

Prices in the weaner market showed falls in the week ending 5 March, with 30kg weaners reversing their previous week’s price upturn by falling £1.15 to £36.61 per head and 7kg weaners falling £0.47 to £28.32. This is the fifth consecutive week declines have been recorded in the 7kg weaner price, and infers that confidence still remains low in the longer term finisher market.

Retail pork market still challenging
The difficulties which pork has experienced at retail level continued in the 12 weeks ending 31 January, according to the latest Kantar Worldpanel data. The volume of pork purchased continued to decline, falling 4% compared with a year earlier, with lower prices further driving value out of the market. A decline in household penetration is the main driver of volume declines, as switching to convenience categories continues to play a major role. Loin roasting joints and marinades were the only two categories to buck this trend.

More encouragingly, the latest four weeks did see a small increase in volume sales of fresh/frozen pork. There was growth across several categories, including belly, chops/steaks and leg roasting joints, although the trend of lower average prices meant that this was at the expense of value.

Sales of bacon, sausages and ham remained down, despite lower prices, on the back of a combination of fewer households purchasing and those that did, buying less. During the 12 weeks to 31 January, the amounts of bacon and sausages purchased were both down 4%, despite prices falling by 5% and 3% respectively. As with pork, sales of sausages did pick up in the latest four weeks, although the value of purchases was still lower due to reduced prices.

Global pig prices remain subdued in 2015
Global pig prices have fallen steadily throughout 2015, following an exceptionally high year for prices in 2014. Based on the prices of the four major exporters (the EU, US, Canada and Brazil), the average export pork price finished 2015 at $2.38/kg. This is the lowest level for over six years, $0.57 lower than the same point last year and over a dollar less than the price peak recorded in June 2014.

Several factors have combined to drive down value in the global pork market. The well documented supply glut following the Russian bans in 2014 has put downward pressure on EU, Canadian and US prices. The EU price has only just started to stabilise in January 2016, in no small part due to the short lived Private Storage Aid scheme. However, the EU price is now at a 12 year low. Coupled with this, the increased production levels in the face of subdued consumer demand have further negatively impacted prices.
US prices have fallen in 2015, as supplies continued to increase. The high domestic prices in the wake of the 2014 PEDv outbreak attracted many producers to expand. The strong dollar has also impacted the US price, forcing it down in an effort to compete on the global stage. The value of Brazilian pork was significantly affected by the weakening of the real against the dollar, attributed to the recessive Brazilian economy. While this helped the volume of pork exported to a range of markets, the effect on value was very dependent on the currency involved, with prices stable in reals but falling sharply in dollars.
Depressed global prices will provide little comfort to EU producers at a time when the EU price is so low. Export prices will need to stay low to compete and, therefore, it is likely that pig prices will remain under pressure, at least in the short term.

Feed market update
UK feed wheat futures (May-16) closed at £104/t on Tuesday, which is an increase of £2.15 compared with last Tuesday. Chicago wheat and maize futures also closed up on the week. UK pig feed manufacturing in January was 2.4% behind the same point last year at 140Kt, according to Defra’s usage data released last week. Pig grower feed production increased in January by 3% year on year but starter, breeder and finisher feed production decreased by 12%, 8% and 2% respectively.

AHDB’s Winter Planting Survey revealed a decline in crop area as at 1 December 2015 across England and Wales, for the second year running. The changes look to be driven by economic and agronomic factors as planting conditions were again generally favourable last autumn. The oilseed rape area in England is estimated 10% lower than in 2015. Unless spring plantings are substantially higher than in the last two years, this sets England up for the lowest oilseed rape area since 2009.

As at Friday, UK rapemeal (34%, ex-mill Erith) for March delivery was £143/t, which is up £5 from the previous week. Brazilian soyameal (48% ex-store Liverpool) for March delivery increased by £1 on the week to £263/t. The soyabean harvest is gathering pace in Brazil, with over half of crops harvested in the kay state of Mato Grosso. Output forecasts for Brazil have been increased by a number of forecasters. Chinese soyabean imports this season (2015/16) could reach 83Mt, according to Chinese company COFCO Futures, due to improved margins on pig production. This would represent a year on year increase of 4.7Mt.

Irish export growth could end in 2016
Having grown for seven consecutive years, Irish pork exports reached 168,000 tonnes in 2015, 13% higher than the year before and more than double their level in 2009. Around a third of this total headed for the UK market and Ireland also exports significant quantities of processed pig meat products to the UK (38,000 tonnes last year, including 9,000 tonnes of sausages). Pork shipments to the UK only grew at a similar rate to those to other destinations in 2015, despite the favourable exchange rate, probably an indication of UK buyers’ continuing preference for domestic product. Trade with Germany, mainly made up of sow carcases as in the UK, was up sharply, partly reflecting an 8% rise in sow slaughterings. Third country trade was only slightly higher, as strong sales to China were offset by reduced exports to Japan, Korea and, of course, Russia.

Last year’s increased exports were aided by a 9% rise in Irish production in 2015, with both higher slaughterings (+6%) and heavier weights (up over 2kg/head) contributing. This followed expansion of the Irish breeding herd during 2014, coupled with improved health status. However, latest figures suggest a different trend is likely for 2016, with the Irish sow herd down 5% in 2015. This means production may well fall back in 2016, although this might be mitigated if carcase weights increase further. In turn, this suggests that the long-term growth in exports could end this year, at least temporarily. With a less favourable exchange rate and narrowing gap between UK and Irish pig prices, this could reduce the amount of Irish pig meat on the UK market. Although this is unlikely to have a dramatic effect, it could provide some much-needed support to domestic prices.

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