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United Kingdom Pig Meat Market Update - August 2010

by 5m Editor
19 August 2010, at 12:00am

James Park, senior economic analyst with AHDB Meat Services Economic and Policy Analysis Group, explains the latest trends in pig production in the UK and European Union.

UK Prices

The deadweight average pig price increased during June to average just above 146p per kg, five per cent higher than at the start of the year albeit five per cent lower than a year earlier. However, the DAPP reduced for three consecutive weeks from the start of July as a result of lower lean meat percentages recorded.

The DAPP sample recorded a 0.5kg decline in the average carcass weight in June to just above 78kg, as result of slower growth rates during the recent warmer and also due to a residual effect from the cold weather experienced in January. Carcass weights were marginally higher than in June last year. Probe measurements increased to average 11mm in June, higher than a year earlier, and further analysis of the sample indicated fewer pigs achieved a lean meat percentage of 60 per cent or higher.

The weaner market price reduced 40 pence per head in June to average £55 per head and continued to decrease during the first three weeks of July to less than £52 as the finished market price started to decline. As a result, the weaner price in week ended 24 July was nine per cent, or £5 per head, lower than a year earlier.

The GB export sow price continued to decrease throughout June, albeit at a lower rate than the previous month, to average 97p per kg, 12 per cent lower than a year earlier. During the first three weeks of July the market dropped again, in line with the European market and following disruption to the UK supply chain.

Exchange Rates and EU Prices

The European pig reference price increased eight per cent to €151 per 100kg in June, similar to year-earlier values, with all the major producing nations increasing producer prices considerably. However, since the start of July, the EU average reduced slightly and in week ended 17 July was €148 per 100kg. Prices in Denmark, Germany and the Netherlands have reduced significantly since the start of July although Spain, France and Poland have offset the decline somewhat.

The EU average producer price reduced marginally during July with Danish prices reducing by six per cent to week ended 25 July.

UK Slaughterings and Production

During the first six months of 2010, 4.5 million clean pigs were slaughtered in the UK, six per cent more than in the same period last year. Slaughterings within England and Wales during the period increased by six per cent to 3.5 million head and accounted for 77 per cent of all UK throughout. Scottish slaughterings within the first half of the year reduced by eight per cent to 298,000 head whereas Northern Irish slaughterings increased by 16 per cent to 639,000 head.

Sow slaughterings totalled 108,000 during the same period, 10 per cent higher than the first six months of 2009.

Pig meat production during the first half of the year totalled almost 370,000 tonnes, eight per cent higher than during the first half of 2009.

The weak value of sterling against the euro in the beginning of this year made UK imports of pig meat more expensive. In the first five months of 2010, total fresh and frozen imports declined 12 per cent compared with the corresponding period a year ago to 136,000 tonnes. This was largely due to shipments from Denmark in the five-month period falling by 37 per cent year-on-year as Denmark has diverted its exports to other EU markets, in particular to Germany. As a result, imports from Denmark accounted for only 22 per cent of all UK imports in January-May 2010, compared with 31 per cent in the same period in 2009. This fall was partially offset in volume terms by increased imports from the Netherlands. Imports from the Netherlands were up by one-third year-on-year to 28,000 tonnes. Reduced shipments from Germany and Spain also contributed to the fall in imports during the first five months of the year.

The higher value of the euro against sterling in the early part of this year contributed to a move for importers to supply higher value products. In particular, there has been a consistent increase in bacon and ham imports over the last two years. In the five months to May, imports of bacon and ham increased six per cent year on year as result of increased shipments from all major trading partners.

The exchange rate has also contributed to the rise in pork exports this year. In January to May exports of fresh and frozen pork increased 29 per cent year on year to 51,000 tonnes.

Increased exports have been predominately to Germany and the Netherlands, where shipments increased by 22 per cent and 45 per cent respectively. In contrast, there has been an eight per cent reduction in trade with non-EU countries.

As a result of increase in volume, the value of exports in the first five months of the year increased by almost 30 per cent year-on-year to £56 million.

Feed Prices

At the time of writing, the market for wheat had been extremely reactive to conditions in Russia. As a result, BPEX issued a briefing note to the industry highlighting the major factors affecting the industry and the knock-on effects to costs of production in the industry.

Introduction

At present feed represents between 55 to 60 per cent of the total cost of production of pig meat for all European pig industries. Within the cost of feed, the principal ingredients are the cereals (wheat and/or barley) and soybean meal, which can account for up to 80 per cent of the ration. Clearly, therefore, the cost of pig feed rations and the total cost of pig production is highly sensitive to changes in the raw material prices of these commodities on the world market.

As has been well-documented in recent weeks and days wheat prices have risen at their fastest rate since 1973 with markets witnessing the biggest jump in July from £103 to £143 per tonne due to concerns of drought conditions throughout the major cereal growing areas of Europe and Russia and the resultant impact on yields.

Russia has subsequently announced a ban on wheat exports causing a very sharp increase in LIFFE wheat futures which are trading at £168 per tonne for November at the time of writing.

This short briefing note aims to quantify the impact of recent price rises on the cost of pig meat production and forecast future movements in commodity prices and how this may impact upon the pig meat supply chain.

Summary

  • Feed represents up to 60 per cent of the current costs of pig production of which the main ingredients are wheat, barley and soya.
  • During July, global and domestic wheat prices increased almost 40 per cent and further quoted prices forecast further increases.
  • Based on current and forecast prices for wheat, barley and soya – which are the main ingredients in pig feed – it is anticipated that the cost of English pig production will rise from 137.2p per kilo in June 2010 to 158.3p in November 2010.
  • The impact of these increases in cost of production is that English pig producers will move into negative returns for every pig slaughtered subject to future movements in the DAPP.
  • This situation is not unique to the English pig industry. All European pig industries are faced with the same challenges from the global feed market and the impact on their profitability is identical, subject to their individual pig price movements in the near future.

Overview of commodity markets - wheat, barley, soya

Wheat

At the start of 2010, the global wheat market was in a heavily supplied bearish state. With ending stocks for the 2009/2010 season estimated at near 200 million tonnes and a forecast third-highest harvest on record, the supply side dominated the market. However, the weather has yet again thrown a spanner in the works. With the worst drought for 130 years hitting Russian grain crops, the world has become very nervous in a short space of time about the availability of wheat from Russia and the Black Sea region. Russia has at the time of writing banned wheat exports. The nervousness in the market has been spurred on by increased investment fund activity and a weaker US dollar over the past month.

The main driver has been the European market with MATIF wheat in Paris up €57.50 per tonne over the past month, to close on 5 August at €234.25. UK prices have followed with new-crop LIFFE wheat futures for November 2010 gaining over £40 per tonne through July alone and on 5 August, it reached £169.

Wheat prices in the US hit near two-year highs recently, with CBOT wheat standing at $254.7 per tonne on 2 August, some $75 higher than a month earlier. The wheat prices have surged above the maize price in the US, with wheat now at a $106 per tonne premium above maize. As a result, this price spread makes wheat in the US less attractive into feed rations and there is the potential for feed wheat demand to lessen.

Barley

The barley market has very much followed the price surges in the wheat market over recent weeks. The concerns over the poorer than expected yields in Europe and the expected lower crops in the Black Sea region have prompted feed compounders across Europe to lobby the EU to release barley stocks from intervention to alleviate the expected lower supply. However, in mid-July, the EU announced that it had no plans to allow the release of barley intervention from stocks, but that it would continue to monitor the situation.

The latest estimates of barley production in Europe are at 54.1 million tonnes, well down from 61.8 million tonnes produced a year ago. The main reason for the lower production is firstly a lower planted area from barley with gross margins looking poor in comparison to feed wheat and oilseed rape; and secondly, the heat-wave through June and July reducing the crops yield potential. Europe is still expected to carry in over 11 million tonnes of barley in commercial stocks.

Soybean meal

The soybean meal market has been supported by spill-over support from buoyant grain prices over recent weeks. The market has also seen support from tight supplies in North America and a strong demand for raw bean imports into China. soybean meal prices have been on an upward trend since mid-March, hitting highs of $350 per tonne in early July. The UK market, and subsequent prices, will be very much influenced by these global factors. soybean meal prices in the UK have gained from £275 per tonne in early March to £300 in late July. However, the strengthening of sterling against the US dollar over recent weeks will have the effect of making US dollar-denominated imports into the UK cheaper in sterling terms and as such will partly negate the price rises seen in US markets.

Looking forward, the soybean market is expecting a record US crop this year, with the 2010 harvest currently estimated at between 91 and 93 million tonnes. The US has seen very beneficial growing conditions this season and the crop is currently forming yield with very little weather concerns. The soybean market now awaits the final size of this US crop to then gauge the relative supply availabilities through to 2010/2011. However, the global supply and demand within the soybean market remains robust. As in 2010/2011, global soybean production is estimated at 251 million tonnes (259 million tonnes in 2009/2010); demand is seen 12 million tonnes higher than the season prior at 247.6 million tonnes, with Chinese import demand seen at one-fifth of world production at 50 million tonnes. So, the potential record bean crop in the US gains more significance as demand is forecast to increase in 2010/2011.

Current and forecast COP

The cost of production (COP) in the pig industry improved during 2009, mainly due to reduced input costs of feed and improvements in physical performance. During 2009, the average cost of pig production was 127.9p per kilo, a seven per cent reduction compared with a year earlier. Despite efficiencies in terms of breed herd prolificacy and growth rates, the industry has been exposed to higher energy, labour and building costs. Following a prolonged period of negative margins for the industry, returns achieved during 2009 allowed the opportunity for greater investment in new buildings.

However, costs of production remain dominated by feed. Costs of production have increased during 2010 and in July the estimated cost of production was 137p per kg.

During 2009, feed accounted for 52 per cent of production costs, a reduction from 56 per cent a year earlier. However, in July 2010, feed was estimated to account for 57 per cent of total pig production costs.

As new feed contracts are being negotiated, there is concern that the industry will once again become loss-making as, at the time of writing, futures prices continue to rise at a time where the producer price has fallen for five consecutive weeks, following a seasonal trend. Taking into account the futures prices and the likely knock-on effect to feed rations the return to producers is important in terms of maintaining a sustainable business. Even if producer prices maintain their current value the industry is forecast to be making a loss by the final quarter of 2010.

The market is presently moving so quickly that the below sensitivity analysis has been prepared to provide a quick guide to COP at different wheat prices.

This current situation is not limited to the UK industry. The grain market is global and other European pig producing nations are experiencing a concentrated impact of increased input costs. EU member states have not experienced similar profitability which the UK has experienced over the last 18 months. As a result, the sustainability of many European pig producers will come into question if higher feed prices are realised.

Conclusions

  • Based on current and forecast prices for wheat, barley and soy, which are the main ingredients in pig feed, it is anticipated that the cost of English pig production will rise from 137.2p per kilo in June 2010 to 158.3p kg in November 2010.
  • The impact of these increases in cost of production is that English pig producers will move into negative returns for every pig slaughtered subject to future movements in the DAPP.
  • This situation is not unique to the English pig industry. All European pig industries are faced with the same challenges from the global feed market and the impact on their profitability is identical, subject to their individual pig price movements in the near future.

Consumption

Pork continued to fare relatively well with increased purchases and expenditure in the four weeks to 11 July. Pork bellies were the main driver behind the increase as volumes and expenditure on pork chops reduced following higher prices in the period.


August 2010