Quarterly update: The global pork market is in a phoney war

I ended my last post for this column in January with the words: “The data, in my opinion, is positive for pork prices, but there are external variables that we cannot measure or predict that can tip the market one way or the other.

Well, that part about “external variables” might still be the understatement of the year. I also wrote in this column that I thought the coming year was like a glass half full and expected hog prices to be relatively high throughout the year. Is this still the case? I will discuss the key components of the global pork meat market with the help of several charts and tables and then try to summarize the direction this market could take in a post-Covid and post-ASF world that now needs to do facing a war between Ukraine and Russia. .

Figure 1 – Global pork price cycle: January 2011-March 2022.

Figure 1 – Global pork price cycle: January 2011-March 2022.

Ascending phase of the pig cycle

In summary, the global pork price cycle has accelerated and Figure 1 illustrates this. Fundamentals point to a bullish phase of the cycle this year with declining supplies and market hogs in the herds of major exporters. The global pork price index could now become a leading indicator again. Although for the wrong reasons, Covid-19 is no longer in the headlines and African Swine Fever (ASF) appears to be just a minor irritation rather than big news.

However, either of these viruses could end up on the front pages quite easily, so care should be taken in planning activities. As I noted last month, signals from the underlying supply drivers suggest that hog and pork supplies will be relatively tight in 2022 and, unless demand drops, that implies prices higher pork. This last sentence deserves more attention.

War: Effects of Pork Producer Costs

The war in Ukraine is having significant effects on producer costs – we cannot ignore a general collapse in producer confidence and/or consumer income and demand. But these impacts have yet to be reflected in production cost functions and consumer prices. We are, indeed, in a phoney war. The energy price hikes happening around the world will reduce consumer incomes and economic growth later this year. Even China is not immune to this.

And how high will grain and feed prices go as fertilizer, grain and oilseed shortages weigh on livestock producers’ costs? Will retailers and foodservice providers stay out of “adjustment” as farmers and consumers find a new balance for their relative supply and demand functions? Let’s review the data and then come back to this question about market adjustment.

Figure 2 – Chinese pork prices, 2009-March 2022 (dw, weekly).

Figure 2 - Chinese pork prices, 2009-March 2022 (dw, weekly).
Figure 2 – Chinese pork prices, 2009-March 2022 (dw, weekly).

Pork prices in China

Figure 2 presents a view of how Chinese pork prices have behaved and where they currently stand. There have been wild swings in supply and prices to farmers, initiated by ASF-related shortages. Chinese government purchases to maintain prices have occurred on and off over the past 12 months, but pork prices in China are, in fact, at rock bottom and well below production costs (and that’s before the last increased costs that the situation in Ukraine has caused). It remains to be seen how much China’s national herd will shrink due to these low prices, but it should now be obvious to the Chinese state that the country’s pig farmers have a strong interest in seeing the end hostilities in Ukraine.

Figure 3 – Chinese pig slaughter, April 2010-February 2022.

Figure 3 - Chinese pig slaughter, April 2010-February 2022.
Figure 3 – Chinese pig slaughter, April 2010-February 2022.

Chinese pig slaughter levels apparently peaked in late 2021 and early 2022 and the latest data in picture 3 show a drop in the number of victims since the beginning of the year. Along with these developments, the level of pigmeat imports and the growth of foreign-origin pigmeat shipped to China declined sharply in 2021/22.

Figure 4 – Daily U.S. pork prices, 2019-2022, deadweight in $/cwt.

Figure 4 - Daily U.S. pork prices, 2019-2022, $/cwt deadweight.
Figure 4 – Daily U.S. pork prices, 2019-2022, $/cwt deadweight.

U.S. pork prices recover

Figure 4 presents daily hog price data in a year-by-year comparison to clarify seasonal price behavior. A recovery in U.S. hog prices is seen in late 2021 and early 2022 and this is easy to understand based on census data. The number of pigs and herds in the United States has steadily declined.

Figure 5 – Total hogs and breeding herd in the United States, 2006-March 2022.

Figure 5 - Total number of pigs and breeding herd in the United States, 2006-March 2022.
Figure 5 – Total number of pigs and breeding herd in the United States, 2006-March 2022.

Figure 5 shows this data in a graph going back to 2006. Table 1 features data from the latest USDA census (March 2022). As these data report, the breeding herd in the United States is down about 2% year over year. Census estimates for the total inventory show a decline of about 1%.

The estimate of the number of market hogs shows a drop of 3.5%. Figure 6 illustrates another aspect of the performance of the hog sector in the United States: its productivity has been rising steadily for several years, but has fallen recently. This may partly be related to Covid, but it is more likely that a high incidence of Porcine Reproductive and Respiratory Syndrome (PRRS) in sows reduces productivity on the farm. Reductions in hog numbers reported by recent USDA surveys as well as PRRS data reinforce the idea that U.S. hog production will be lower in the first half of 2022.

Figure 6 – US hog herd productivity, 2004-March 2021.

Figure 6 - US hog herd productivity, 2004-March 2021.
Figure 6 – US hog herd productivity, 2004-March 2021.

Europe: pig farmers in contraction mode

In Europe, pig farmers have been in “contraction mode” for most of 2021. Census data for December 2021 for the EU showed a 3.5% drop in the breeding herd. Only Spain, among the major pig-producing countries, was expanding, with a 2% increase in herds at that date. The German breeding stock decreased by 7%. The outlook for pig numbers in Europe is negative in the first half of 2022 but with rising feed and energy costs I see no rush to increase numbers and this suggests fewer pigs in the 2n/a half of 2022 as well.

The sharp rise in European pork prices illustrated Picture 7 indicates that the market is already short of pigs. EU pigmeat exports fell by 2.7% in 2021, but domestic demand appears to be holding up. So far, the drop in export demand (led by China) has been offset by a recovery in the EU economy.

Figure 7 – Pig prices in the EU (class E), January 2014-March 2022.

Figure 7 - EU pork prices (class E), January 2014-March 2022.
Figure 7 – EU pork prices (class E), January 2014-March 2022.

Resilience of the global economy

Now, what about the fit I talked about earlier? How resilient is the global economy to the war in Ukraine and the resulting sanctions against Russia? How will changes in production costs and consumer incomes affect market prices? And when will the phoney war end – when will these price changes be visible in supermarkets?

Previous conflicts in the Middle East, Vietnam, Korea, Iraq and Afghanistan offer few clues. Although Ukraine does not represent a large part of the global economy, Russia’s trade in energy and raw materials is significant and has been brought into the mix. The economic impact is more akin to World War II than the regional “conflicts” we have known since 1945. Last year, the International Monetary Fund (IMF) predicted that global growth for 2022 would be 4 .4%, but it will issue a revision after Easter and I expect it to cut that forecast in half. I hope I’m wrong.

Hog prices will be higher, costs too

So after seeing the text and graphics above, is it still a glass half full? I’m not afraid, because the likely changes in producer costs and consumer incomes are just too big for the adjustment to go unnoticed in the shopping basket or in farm and hog unit production decisions . Pork prices will be higher, but so will costs, and consumer purchasing power in supermarkets will fall – and some consumers will go hungry in 2022.

It’s more like a half-empty glass. The only silver lining in this rather gloomy ending is that, if the war between Ukraine and Russia can end in Ukraine’s favor, there will likely be a restructuring of the Western economy and the agri-economy. Ukrainian which will go to some extent to stimulate economic growth in Western aligned countries.

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