It was the Best of Times, it was the Wurst of Times

Article   17 May 2019

The global and UK pig and pork markets are currently being pushed and pulled simultaneously by various factors that could result in major price swings.

This environment has resulted in elevated price volatility and uncertainty with regards to future investments, stocks and just about everything else. Will pork prices rally as African Swine Fever (ASF) decimates the Chinese herd, or will negative trade implications (including trade wars, Brexit, and potential barriers in response to ASF) and demand destruction push values lower? One thing is certain, the variables impacting the hog market have increased volatility and will likely keep it elevated, meaning risk management strategies will be key to weathering this period. We want to highlight some of the pig and pork indexes Stable works with and look at factors impacting future trends.

Figure 1: Global Swine Stocks

Source: FAO/USDA/Rabobank

Source: FAO/USDA/Rabobank

ASF is expected to reduce the Chinese pork production 25% -35% (Rabobank) or up to 200 million pigs (figure 1), with a large drop in Southeast Asia also expected (where the losses may just be starting). At this point no one knows what the full extent will be, but estimates are growing and the lowest forecasts are already significant. Such a reduction in the supply chain cannot be easily replaced, but imports, substitution with other proteins, and a drop in demand as prices rise will work in concert to fill the gap. Chinese imports are forecast at a record 2.2 million tonnes in 2019 (USDA), representing a quarter of global trade. This is despite estimates that internal Chinese demand will hit a 10 year low this year. EU prices have responded to the increased export demand outlook (figure 2) with a major rally since February when values were near multi-year lows. Stable uses EU prices to track those markets. For the UK, the AHDB’s excellent price indicators offer a clear picture of the market and give Stable the indexes we use to offer price volatility protection. Protection on upside and downside is currently relevant.

 

Figure 2: EU Pig Meat Prices (EUR/100kg)

Source; EU AgriDG

Source: EU AgriDG

While expected increased Chinese demand has pulled up values in the EU and US, UK prices have yet to respond. This is a function of large stocks in anticipation of Brexit among other reasons (explained well on Pork Talk). While the ASF is supporting international prices, the combination of the trade war between China and the US, the uncertainty surrounding Brexit and the future trade between the EU and UK (where 60% of pig meat is imported from the EU) is pressuring prices. Price volatility (measured on a weekly basis) in the US futures market is now higher than any other time in the past 15 years (figure 3).

 

Figure 3 CME Lean Hog prices and Weekly Volatility

Source: CME

The implications of ASF cannot be understated, but it may not all be upward. ASF has appeared in the EU’s Eastern borders (map) increasing concerns about trade barriers being put into place; the AHDB’s review highlights this issue. This would have a major negative impact on any EU nation’s export potential and prices; the export market is important as EU demand stagnates. Agricultural markets are generally cyclical and a rally in pig prices may result in an overabundance in supply as a response. Pig Progress highlights this issue, among others that may weigh on prices. With such uncertainty about future momentum it is impossible for the industry to plan and invest.

 

Figure 4: AHDB Pig Prices

 

 

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