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AHDB Pig Market Weekly

15 August 2016

AHDB Pig Market Weekly - 15 August 2016AHDB Pig Market Weekly - 15 August 2016


EU sow prices recovering

After a period of stability at the beginning of the year, the German, Dutch, French and Danish sow prices have all been increasing. For German and Danish sows, this has been from record low sow prices, and comes as welcome respite. At €1.18/kg, the German price is now back at levels last recorded in November 2014.

The sterling value of the German cull sow price has also increased since the beginning of June, although the weakening of sterling against the euro following the Brexit vote has meant that this rise has been somewhat more subdued.

The German cull sow price has set the trend for other EU sow prices, with them all recording increases. The Danish price has risen from a low of €0.60/kg in March, to finish the latest week at €0.89/kg, which has not been seen since September 2014. The Dutch price started its rally a little later, coming from €0.83/kg in May to finish July at €1.04/kg. The French price has continued its steady increase throughout the year, with the current price at €1.12/kg, €0.33 more than at the start of the year.

With reports of tightening of supplies within the EU, the cull sow price has responded positively to this movement. With the censuses of the major producing states largely reporting an overall decrease in the size of the breeding herds, and production forecast to fall in the second half of 2016, it can be expected that further support to the cull sow price may be forthcoming.

US exports largely stable over first six months

US exports of fresh/frozen pork remained largely stable in the first half of 2016 on last year, at 784 thousand tonnes. However, the value of these exports fell just under 6% to $1,989 million over the same period. This stability in export volumes was largely supported by an increase in shipments to China, as the other large importers of US pork all recorded decreases over the first six months of the year.

Mexico remained the largest importer of US pork, accounting for just under a third of all shipments. However, export volumes to Mexico recorded a 4.5% decrease on 2015 levels. Japanese shipments also saw a 14% decrease. This was largely due to fewer frozen cuts being shipped, as the US focused on promoting the higher value chilled cuts, which increased in volume. Chinese shipments continued to go from strength-to-strength, almost trebling on the same period a year earlier. The US Meat Export Federation (USMEF) is continuing in its efforts to promote the value of US pork to both processors and end users, to enhance the sustainability of this export trend. Shipments to South Korea recorded a fall of one-third on 2015 levels. This was predominantly due to domestic production in South Korea ramping up again, following outbreaks of FMD. However, the US has gained a larger market share of the decreasing Korean export market.

UK pig prices

The EU spec SPP continued to rise in week ended 06 August, up 2.59p to 133.98p/kg. This was the second largest weekly increase since the SPP reporting system was launched, and returns the SPP to levels last seen in February 2015. This also means that the SPP is finally above last year’s levels, by 1.4p. The last time weekly price was greater than at the same period a year before was back in May 2014. Tightening supply, strong export demand and rising EU prices are all contributing to the support the UK price is currently receiving. Combined with this, the falling value of sterling against the euro is continuing to increase the attractiveness of domestic pork over its European counterparts.

Estimated slaughterings increased slightly on the previous week, up 2% to 174 thousand head. They were also up 4% on the same period a year earlier. Average carcase weights largely stood on last week’s levels, up 0.01kg to 81.52kg. However, they are still 1.17kg heavier than at the same point a year earlier.
The EU-spec APP also increased in week ended 30 July, by 84p to 133.66p/kg. This reduced the gap between the APP and SPP to 2.27p, which is the lowest since July 2014.

7kg and 30kg weaners both continued to record price increases in week ending 06 August. 7kg weaners increased by 70p to £32.68/head. This was only 52p behind the same point a year earlier, and returns the price to levels last recorded in October 2015. 30kg weaners saw a price increase of 82p to £44.82/head. This was 83p more than the same point a year earlier, and these levels have not been recorded since September 2015.

Agricultural policy models around the world

Brexit has created the opportunity for the UK to create its own Agricultural Policy. To date there have been no official announcement on a future UK agricultural policy. However, the latest edition of AHDB’s Horizon series looks at different agricultural support models from specific countries around the world and evaluates their impact on the agricultural industry. The report is not intended to predict in which direction UK Government may choose to go but to outline examples of the alternative models that currently exist.
The report reviews the public instruments that are used to tackle price and income volatility in the United States, Canada, Australia and New Zealand. These are all countries that have a lower level of support than the EU. The report also reviews the nature and importance of current support arrangements (under the CAP) and looks at how World Trade Organisation (WTO) rules will constrain the UK government’s options.

Danish breeding herd still shrinking

Provisional figures from the 1 July pig census showed that the number of pigs fell at the start of Q3 2016 versus the same period a year earlier, by 3%, to 12.3 million head. This continues the year-on-year decline that has been recorded in the pig herd each quarter in 2016. The breeding herd was also back by 3% on 2015 levels, and for the first time this century, total sow numbers fell below 1 million. Both in-pig sows and in-pig gilts were down 3%, while maiden gilts recorded a modest rise of 1%. All of this is indicative of a continuing tightening of supplies in the second half of the year.

The number of young pigs fell modestly by 1%, while slaughter pig volumes were back slightly more at 3%. Therefore, it may be expected that production volumes will fall both in the shorter and longer term.
Throughout the second quarter of 2016, the Danish pig reference price has surged over €19/100kg, and currently stands at €150.01/100kg for week ending 31 July. The tightening of supplies, coupled with strong export demand from China, has contributed to this, although price growth has started to slow in recent weeks.

Pig feed production up in the first half of 2016

Total GB compound pig feed production for the first half of 2016 totalled 916,000 tonnes, a slight increase (0.4%) on the same point in 2015, according to latest data released by Defra last week. Breaking it down by feed type, grower feed production increased by 1% to 230Kt and finishing feed production increased by 4% to 451,000 tonnes, in the first half of 2016 compared to Jan-Jun 2015. However, pig breeding feed production decreased by 4% to 203,500 tonnes over the same period.

In terms of feed ingredients used in total GB animal feed production (compound and IPU), from January-June, 3% more wheat and 2% less barley was used compared to the previous six months at 2,323,700 tonnes and 511,200 tonnes respectively. For the majority of animal diets, wheat has a higher nutritional value to barley.

The increased usage of wheat over barley could be attributed to the price relationship between the two feed ingredients. Since the start of March to the end of May, the discount of UK average ex-farm feed barley to UK average ex-farm feed wheat closed below £5/t, making wheat a more attractive feed ingredient. However, since the start of June, the price gap between the two cereals has widened once again (£14.50/t as at w/e 28 July). If this price relationship continues, going forward more barley may be used in animal feed production at the expense of wheat.

Interest rate cut to 0.25%

The Bank of England has cut interest rates at the monthly meeting of the Monetary Policy Committee (MPC), from 0.5% to 0.25%. This is the first change in interest rates since 2009.
With economic data since the referendum showing significant slowing down in the economy, many economists agreed that a cut in interest rates was necessary to help boost the economy. The theory is that reducing the cost of borrowing will increase spending in the economy. However, as always in economics, it is rarely that simple in practice.

An interest rate cut may well reduce mortgage payments (for those on a variable rate) and increase disposable income, as well as making personal and business loans cheaper for larger purchases or for investment. This may increase activity in the economy and increase growth.

However, an interest rate cut has other effects. First, it is likely to cause further depreciation in sterling. Indeed, sterling has lost over a cent against both the dollar and the euro immediately following the announcement. This should create opportunities for exporters by making exports cheaper on world markets, but as many consumer goods and agricultural inputs are imported, these would become more expensive. This demand for imported goods is known as ‘inelastic’ i.e. it does not change much in response to a price rise. This means as a nation we are likely to continue to import the same amount of goods and services, but will be paying more for them, driving inflation higher. Inflation, currently at 0.5% has been well below the governments’ target of 2% since 2014, but the most recent forecasts show an increase to 0.8% by the end of this quarter, rising to above 2.7% by 2020. For farmers, they have the positive of greater opportunities to export, along with the negative of higher input costs. How much this will effect individual enterprises will depend very much on the balance between these two variables.

Secondly, although in theory a cut in interest rates should boost investment, the decision to invest is complex. In times of uncertainty, the cost of borrowing is only one factor that will influence business decisions to invest. The economy is at significant risk of lack of investment during these turbulent times, and a cut in interest rates alone is unlikely to significantly affect this. Farmers may understandably be reticent to make major investment decisions until the terms of Brexit, in particular, the UK’s trading relationships with the rest of the world, along with domestic agricultural policy are much clearer. Underinvestment in industry leaves us at a competitive disadvantage as it directly affects productivity, making UK industry less competitive on world markets going forward.

While some may welcome an interest rate cut, it is mainly seen as a signal that the Bank of England is taking action to support the UK economy. Other measures may follow and AHDB will monitor economic policy announcements as they are made available, keeping levy payers informed of their likely impact.

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