Rabobank has published a new report on the global pork industry, looking at issues of supply, demand and pricing in key markets worldwide, particularly the issue of sourcing for markets affected by porcine epidemic diarrhoea virus (PEDv).
In the report, Rabobank's Food &; Agribusiness Research team says the global pork market is moving into record territory in Q3. Especially in the exporting countries impacted by PEDv, hog and pork prices will continue to break records in the remainder of Q3 and into Q4. Those record prices will support positive price developments for hogs and pork across the globe, with prices further supported by high beef and poultry prices. However, in the European Union (EU) and China, markets will improve seasonally but will not reach the highs experienced in other countries.
"In the U.S., Mexico, Japan, and South Korea – the countries that have been affected by PEDv – the key question will be, ‘Where to source pork?"," said Rabobank analyst Albert Vernooij. "In those countries the decline in supply, along with declining feed costs, are expected to push farmers" profitability into record territories. In contrast, processors" margins will be pressured due to the strong competition for hogs."
While the U.S. is mitigating the effects of PEDv on supply and prices with rising hog weights (recently up nearly 5% over last year), the increasing scarcity of pork globally is pushing import prices up, impacting Mexico, South Korea and Japan in particular. In Mexico, pork meat prices have increased around 25% year-over-year and have the potential to increase another 5%. Japan is also feeling a significant impact, as imports are relatively expensive compared to other importing countries due to the low value of the yen. With beef supplies also under pressure, Japanese processors will find it challenging to source sufficient meat supplies.
For China, the prospects are turning positive, with hog prices forecast to recover after a very difficult first half of 2014. Chinese pork prices are expected to stay at the current low level through most of Q3 2014. However, prices will likely rebound from the end of Q3 onwards, driven by the seasonal uplift in demand and lower supply after the sow culling of the last months. This will be supported by the limited global supply, which will increase competition for imports and support higher prices. The key challenge for hog farmers to recover part of their losses is to limit herd expansion. Many smaller farmers will face shakeouts in 2014, which will advance market consolidation.
As the only region with enough pork available at reasonable prices, the EU has positive prospects for exports to Asia and the U.S. However, this will not be sufficient to totally compensate for the lower exports to central and eastern European countries. The Russian import ban remains a deciding factor for price levels. In addition, the importance of exports to central and eastern European countries for the total carcass valuation, in combination with the high value of the euro, will limit the seasonal increase of EU pork prices. However, if pork trade between EU and Russia partially or totally reopens, that would give a positive boost to EU pork prices.
"With PEDv continuing to impact supply into 2015, prospects for the global pork industry remain positive," concluded Vernooij. "The main wildcard is keeping supply discipline, as many farmers will be tempted to expand production driven by the low feed costs and high profitability."