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Outlook for the Irish Pig Sector in 2012

by 5m Editor
27 January 2012, at 12:00am

Over the last two years, the Irish pig industry has experienced the lowest profitability in more than a generation, according to Michael McKeon from Teagasc's Pig Development Department in his outlook for pigs in 2011/12.

Introduction

A rapid escalation in cereal prices in 2010-2011, including the largest single month’s rise in wheat price since 1973, resulted in the composite price of pig feed reaching a twenty year high. Unfortunately the market price for pigmeat did not rise in tandem due to a plentiful supply and a weak export market. This resulted in a depressed farm-gate pig price for much of 2010 and into 2011. The effect of this cost squeeze has seen the industry suffer a significant loss over the last two years. The industry has recently returned to a marginally profitable position but will require a significant and sustained period of profitability to recoup the accumulated losses it has sustained.

Irish Pig Production Costs

The cost of producing pigmeat in Ireland can be segregated into feed cost and non-feed cost. Feed constitutes 70 per cent of the total cost of producing a pig with the non-feed inputs contributing the remaining 30 per cent. The largest volatility over the last two years has concerned the feed cost input.

Irish pig feed costs

The Irish pig industry utilises a relatively small selection of feed ingredients, principally wheat, barley and soyabean meal (soybean meal) with small inclusions of maize (corn), rapeseed and assorted oils. Ireland does not grow some of these ingredients and is not self-sufficient in the remaining ingredients, therefore, the pig industry must import a significant volume of its feed ingredients. This leaves the industry very exposed to fluctuations in the supply and price of internationally traded feed ingredients. This exposure was demonstrated when wheat production in the Black Sea region (Russia, Ukraine, Kazakhstan) contracted due to a serious drought in 2010. This caused a severe reduction in wheat yields and the affected countries responded by closing their borders to wheat exports. Table 1 presents exports of wheat from the Black Sea region for the period 2009/10 to 2011/12.

The reduction in Black Sea exports caused an immediate escalation in wheat and barley ingredients prices in late 2010 and early 2011 from Ireland’s principal suppliers, France and the UK. Figure 1 shows prices for UK barley and French wheat over the 18-month period to the end of 2011.

Figure 1. Feed Ingredients weekly prices July 10 to December 2011

The scarcity of wheat as a protein source also increased the rate of substitution to soyabeans with a resultant price escalation in the price of soyabeans in late 2010 and early 2011. The subsequent bumper South American soyabean harvest in spring 2011 eased the pressure of soyabean supply leading to a corresponding drop in price. Figure 2 shows prices for soyabeans over the 18-month period to the end of 2011.

Figure 2. Soyabean weekly prices July 2010 to December 2011

The price spike for the main pig feed ingredients from August 2010 onwards led to the Irish composite pig feed price increasing to its highest level in over 20 years. Annual Irish pig feed prices are shown in Figure 3.

Figure 3. Irish composite pig feed price from 1992–2011

The composite compound feed price increased by €24 per tonne from January to a peak in May 2011. The price then stabilised with the arrival of cheaper South American soyabeans and later eased with the onset of the northern hemisphere grain harvest in July 2011. Monthly prices for pig feed in 2011 are shown in Table 2.

The annualised feed cost per kg deadweight of 112 cents is significantly higher then in 2010 (93 cent) and 2009 (94 cents). The increased feed cost during 2011 caused serious cash–flow difficulties for producers. The traditional length of feed credit within the industry (three to four months) indicates that many producers are only now seeing the reduced feed cost being reflected in their cashflow accounts.

Non-feed costs in Irish pig production in 2010

The non-feed costs can be partitioned into ‘Common Costs and Herd Specific Costs’. The common costs apply on all units and represent the largest component of non-feed costs. The data quoted for Irish industry is collected from herds using the Teagasc Pigsys herd recording system which records, analyses and benchmarks herd productivity and financial performance. The costs quoted are based on 2010 data which is the most recent analysis of annualised costs available. Common costs are itemised in Table 3.

The common costs in 2010 were 1.4 cent lower than the five-year average. A larger reduction may have been anticipated in 2010 but the industry had previously experienced low profits margins in 2009 which resulted in a four cent reduction in common costs. This low cost base was further reduced in 2010 primarily by reducing the labour/management input cost by 1.1 cent. This reflected the tightening financial situation in the latter part of 2010.

Herd-specific costs in Irish pig production in 2010

These costs include interest payments and building depreciation and vary greatly from unit to unit depending on the age of the unit and the level of continuous capital investment undertaken in the business. Herd specific costs are itemised in Table 4.

The reduction in interest and depreciation costs in 2010 reflects the poor profitability of the industry in the preceding years which therefore limited capital investment.

Total cost of Irish pig production in 2011

The estimated cost of production in 2011 (based on 2010 non-feed costs and 2011 feed costs) was 152 €–cents per kilogram deadweight (dwt) for pigs delivered to the slaughter plant. The level of this cost varied from a low of 148 cent per dwt in January 2011 to a high of 156 cents in May 2011. This variation was principally due to the fluctuating feed cost.

Irish Pig Prices in 2011

The estimated average pig price in 2011 was 151 cent which was six cents above the five year average (2006-2011) of 145 cents. Monthly Irish pig prices are shown in Table 5.

The higher Irish pig price in 2011 was a combination of a more vibrant export market outside the EU and a response to the higher cost of production. The higher pig price was also reflected across other European Union countries as shown by the survey results in Table 6. This survey of the principal European pig prices revealed annual increases of between nine per cent and 16 per cent between 2010 and 2011.

Profitability of Irish Pig Production in 2011

The margin over feed costs per kg deadweight in 2011 has continued the pattern of recent years by fluctuating widely as illustrated in Table 7.

When the 2011 margin over feed is compared to the average margin over feed of the last five, 10, 15 and 20 years (see Table 8), the difficult trading conditions and low profitability of the recent years are clear.

When an average figure of 45 cent per kg (estimated by the author as a requirement to meet production costs including financial repayments) is added to the feed costs incurred during 2011, it it is clear that an operating margin deficit existed in Irish pig production for much of 2011. Figure 4 shows the pig price, productions cost and operating margin in 2011

Figure 4. Estimate of Pig Price, Production Costs and Operating Margin in 2011

Irish Pig and Sow Numbers in 2011

The latest European census (June 2011) reveals a decrease in the total pig population of 0.4 per cent when compared to the June 2010 census with the largest reduction of 0.5 per cent in the 80-100kg category, reflecting the economic reality of feeding pigs to heavy weights given the current high feed cost environment. The latest Teagasc sow survey of commercial pig production units in 2011 revealed a slight increase in sow numbers when compared to the previous survey. Irish sow numbers are shown in Table 9.

As this survey was completed in January 2011, it does not reflect the difficult trading conditions suffered in the latter part of 2011. However, anecdotal evidence suggests that there has been a slight decrease in the national sow herd during 2011. This assertion appears to be supported by the increased number of sows culled in Irish export plants in 2011 as illustrated in Table 10.

Examination of production trends in a selection of the key EU pig producing countries (Table 11) shows a combined decrease in their sow herd of 3.7 per cent from 2010. This is in addition to the 1.1 per cent decrease from 2009-2010.

Sows in Table 11 are defined as gilts from first service. The selected key countries represent about 88 per cent of the total EU sow numbers and include the largest EU pig exporters.

Slaughter Pig Disposals in 2011

The number of pig disposals in 2011 were 9.4 per cent higher than in 2010. This reflected an increase in the productivity of the national sow herd and the introduction of new vaccines onto the market which reduced mortality.

Figure 5. Irish pig slaughter from 2005 to 2011

The ratio of Republic of Ireland origin pigs in total pig slaughter in Northern Ireland plants had been increasing in recent years but remained steady in 2011 at 18 per cent as illustrated in Table 12.

The trend of increased slaughter pig disposals in 2011 is also reflected in Europe as illustrated in Table 13. Over a 47–week period (except UK), the major European producing countries increased the number of pigs being slaughtered by 2.1 per cent in 2011 compared to 2010.

A further analysis of the European data reveals a declining trend of pig disposals year-on-year. The first 30 weeks of 2011 revealed a 2.3 per cent increase year-on-year but the following 17 weeks revealed this increase had declined to 1.7 per cent.

When the principal exporting countries (Germany, Netherlands, Denmark) are further analysed (Table 14), it reveals a year-on-year decline of 0.2 per cent for the latter 17 weeks analysed.

EU Pigmeat Exports & Imports in 2011

The export of pigmeat products outside the EU continued to increase in 2011 as shown in Figure 6. The volume exported from January to October 2011 was 21 per cent higher then the same period in 2010 and is 50 per cent higher then in 2001. The largest export destinations were Russia, Hong Kong and China which contributed 56 per cent of the total volume exported from the EU.

Figure 6. EU pigmeat exports from 2001 to 2011

The total volume of EU pigmeat imports declined by 15 per cent in January to 29 November compared to the same period in 2010.

Outlook for the Irish Pig Market in 2012

The outlook for the pig market can be segregated into pig feed and pig price as these will be the key factors affecting profitability.

Irish pig feed price outlook in 2012

Pig feed is the single largest input cost – 70 per cent – of pig production, therefore, the cost trend of this input will have a substantial effect on the profitability of the sector in 2012. The feed outlook can divided into the outlook for wheat and soyabeans as these are the principal pig feed cost drivers.

Wheat prices in 2012

The level of wheat production in 2011/12 is predicted to be among the highest of all time. The Black Sea had a bumper harvest in 2011/12 and it appears that Australia will also exceed their record harvest from last year by one million tonnes (MT). The Argentinian harvest is predicted to be lower than 2010/11 but still substantial at 13MT. The overall global wheat production is forecast by USDA and Strategie Grains to be between 686 and 689MT. This is approximately 32MT higher than in 2010/11. Forecast wheat production from principal export regions is shown in Figure 7.

Figure 7. Forecast Wheat Production for 2011-2012

The global closing stock of wheat in 2010/2011 is forecast to be very comfortable with a closing stock to usage ratio of approximately 29 per cent.

Soyabean

The forecast volume of global soyabean production in 2012 is predicted to be 259MT (USDA), which will be lower then last year (264MT) but similar to 2009/10 (261MT). Argentina is predicted to have a bumper harvest of 52MT but is dependent on the El Niña weather system not depressing yields. Brazil is forecast to have a lower harvest than last year by 3MT but will still produce 72MT. The demand for soyabeans within the EU is expected to be lower than last year due to the availability of cheaper wheat creating a substitution effect. Forecast soyabean production from principal export regions is shown in Figure 8.

Figure 8. Forecast Soyabean Production for 2011-2012

Irish pig feed prices in 2012

The estimated composite compound feed price in December 2011 was €296 per tonne. It is anticipated that feed ingredient prices will fall further due to the abundance of wheat on the global market and the predicted satisfactory soyabean yields. In 2009 in a similar scenario the composite pig feed price fell to €252 after high feed prices in 2008. In the author’s opinion, the composite feed price in 2012 will react in a similar fashion and will decline by eight to 10 per cent from current price levels.

This price fall will be dependent on the euro exchange rate remaining relatively steady and continued volumes of Chinese soyabean purchases that are close to the predicted: 56MT for 2011-12.

Irish pig prices in 2012

The Irish pig price was relatively strong in 2011 and in the authors view this will continue in 2012. The continuing reduction in the EU sow herd size and the trend of declining slaughter pig disposals (Figure 9) will reduce the availability of pigs for sale. In addition, the buoyant export market looks set to continue due to the current weak euro.

Figure 9. Change in EU Quarterly Pig Slaughter 2009 -2012

Profit margin

If the feed price falls as forecast and the pig price remains buoyant, there will be moderate profit margin available for pig producers in 2012. This margin is critically required in order to restore the industry to a sound financial base, allow feed debt to be reduced and enable producers to evaluate the feasibility of investment in building infrastructure to comply with forthcoming sow welfare regulations in January 2013.

Conclusions

In 2011, the Irish pig industry suffered the worst economic conditions in over 20 years, primarily due to the escalating feed costs. In light of these conditions, the size of the Irish sow herd has remained very resilient with only a small reduction in size. The outlook for 2012 is for the industry to return to profitability with feed prices looking set to decline from their current high plateau. The composite pig feed cost of €296 in December 2011 is expected to fall by 10 per cent during the current year provided currency exchange rates remain relatively stable and harvested crops return average yields close to the five year average.

The pig price was strong in 2011 compared to 2010 but not sufficiently high to offset the negative impact of the rise in feed costs on profitability. It is expected that the market conditions in 2012 will continue to return a high pig price, primarily due to a reducing number of pig disposals in the main European pig producing countries and strong export conditions outside the EU.

The lower feed cost and strong pig price are expected to generate a healthy profit margin for pig producers in 2012. This will be required to reduce previous accumulated losses and allow necessary infrastructure investment in sow welfare housing.

Further Reading

- You can view the full report by clicking here.

January 2012