6th February 2015

Challenging market for UK pigmeat

The month of January saw UK farmgate pig prices ease which is not unusual for the beginning of the year when meat consumption tends to be subdued after the excesses of the festive season. 

However, farmgate prices have been trading around 16% lower than a year ago with a number of factors at play, according to Iain Macdonald, Economics Analyst with Quality Meat Scotland (QMS).

“The most significant of these have been on the supply side.  Indeed, at the UK level, 2014 was the fifth consecutive year of increased pig slaughterings and the number of pigs slaughtered was at its highest level since 2002,” said Mr Macdonald.

“Once you factor in heavier carcase weights, at 862,100 tonnes, UK pigmeat production was at its highest level of the century. At the start of this year, weekly abattoir throughput is estimated to be running seven percent ahead of last year.”  

The increased level of supply has come despite UK census data reporting a contracting breeding herd.  In June 2014, sow numbers were down 3.5% year-on-year at 406,000 head and compared with 2002, there were 28% fewer sows. 

“These figures show how significant the improvement in pig sector productivity has been.  Years of investment in improving herd health and genetics have seen a huge leap forwards. 

“With the cost of feeding each sow spread over an increased output of pigmeat, producers are therefore better placed to withstand a reduction in farmgate prices,” observed Mr Macdonald. 

“However, feed costs have also played their part. In late January, feed wheat was trading at less than £120/t at the farmgate, compared with £160/t a year earlier and £220/t two years ago. 

“Two good years of growing conditions in the US Midwest have seen global grain production surge and prices fall back sharply.”

It has been a similar scenario, he said, for soyabeans and this has pushed down the cost of buying in soyameal. Although, a decrease in the value of sterling against the US dollar has limited the extent of the soyameal price decline to around 10% when quoted in sterling.  With feed around two-thirds of overall production costs, this will have eased the pressure on margins.”

“Looking again at pig prices, it is not only domestic supplies and productivity which have been putting pressure on the market.  With the EU locked out of Russia - a key export market - for over a year now, processors across the continent have found it harder to find customers for fats and offals as well as for fresh meat” said Mr Macdonald.

Furthermore, pigmeat production across the EU has increased, rising more than four percent year-on-year in the three months to October, adding to the imbalance between supply and demand.

“The consequence of this imbalance has been significantly lower producer prices.  Indeed, the EU average was nearly a fifth lower than a year earlier in the week ended January 25, with even larger declines of 22% in Holland and 28% in Spain,” said Mr Macdonald. 

The fall in prices on the continent makes importing pigmeat look favourable to UK food manufacturers and retailers. At the same time, it makes exporting difficult, forcing UK exporters to accept much thinner margins if they need to compete based on price. 

Adding to these pressures, observed Mr Macdonald, has been the sterling exchange rate against the euro.  During the second half of 2014 the pound traded 5-8% stronger year-on-year against the euro

Since the European Central Bank announced a programme of buying bonds from banks and asset managers, the euro has fallen further and, at around 75p, is worth 10% less than a year ago. “In recent weeks the differential between the UK and EU average farmgate price for pigs has widened to stand at 40% in late January.  This compares with 20-25% in the first quarter of 2014 and just five percent two years ago. 

“So, despite an even stronger rise in production in the UK, prices have been falling much more slowly than on the continent.  One likely explanation for this is consumer loyalty in Britain and a preference for British pork over imported product. 

“Indeed, if we look at household purchasing data from Kantar Worldpanel, while overall pork sales volumes in GB were little different in 2014 from 2013, the volume of home-produced pork sold increased by 6.5%.”

Over the Christmas period, home-produced pork outperformed the overall market, showing a three percent increase in the four weeks to January 4, compared with an overall one percent decline.  This change in consumer demand suggests that the wider gap between UK and EU prices might just be sustainable.

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