A challenging winter has been followed by a strong recovery in Britain’s pig market

The pig industry in Scotland continues to face a complex set of challenges emanating from the temporary closure of the key pig processing site at Brechin in January. According to the latest market commentary by Quality Meat Scotland (QMS), along with the legacy of extremely challenging market conditions faced across the UK last winter, pig producers in Scotland have been faced with additional uncertainty, with Brechin now operating at around 50% capacity.

Iain Macdonald, QMS Senior Economics Analyst, said that the coming months will prove critical for the long-term confidence of pig production in Scotland.

“After a challenging winter of depressed pig prices and rising production costs, the pig market has recovered strongly between spring and summer 2021.  Indeed, from a low of 138.5p/kg in February, the GB price for standard pig carcases (SPP) climbed by 15.5% to reach 159.9p/kg in the week to July 10th.”

Between mid-February and early July, the increase was double that of the historic trend, taking per kilo prices from around 2% below the five-year average to 5.5% above it.

However, there have been signs of the market beginning to soften as we approach the traditional summer high, with the rate of increase slowing. 

To assess the prospects for the autumn, Mr Macdonald says that we first have to look back.

“Since the SPP was introduced in 2014, farmgate prices have fallen between July and December in five of the seven years.  In 2020, the decline was the strongest of the period.  The exceptions were 2016 and 2019, when surges in pork imports to China had boosted the global market.

“Prospects for the second half of 2021 are once again likely to depend on global market forces, with the 2020 fall coming despite firm domestic retail demand.”

Highlighting global exposure, Defra’s meat balance sheets estimate that around 30% of UK pigmeat production was exported in 2020, up from around 25% in the middle of the last decade, while 50% of total UK market supply was imported, down from an average of 55% from 2015-19.  High levels of trade reflect differences in consumer demand, with imports and exports balancing supply and demand across the product mix.

“Effectively all of the UK’s pigmeat imports come from the EU,” said Mr Macdonald.  “Producers in the EU saw even sharper price declines last winter, with GB prices averaging around 25% above EU levels between October and February.  While reduced demand from the catering sector limited import volumes, falling EU farmgate prices did pass through to the cost of importing pigmeat to the UK, and the option of a cheaper alternative will have pressured prices across UK supply chains,” he continued.

Like in GB, EU prices made a sharp recovery in spring 2021, narrowing the price gap between GB and the EU to around 5% between mid-March and mid-April.  The average price of imports to the UK also began to rebound.

However, while GB prices have continued to trend higher, the EU market has faced renewed downwards pressure since mid-June. With the EU average slipping to 134p/kg, the GB premium has surged towards 20%.  Furthermore, German pig prices have been forecast to fall by around 3% in the coming week.

On the supply side, while the EU sow herd was unchanged in 2020, more finishing pigs were carried into 2021, raising slaughter, while the trend of increasing carcase weights is likely to add further to production volumes this year, pressuring the market.

Mr Macdonald acknowledges that, in recent years, there has been a shift in UK pork exports, with the share destined for non-EU climbing to 56% in 2020, up from 31% in 2015.  This trend has continued in 2021, surging to 76% in Q1, before easing back to 67% over April and May.

“China has been the major driver of this shift, on the back of a surge in its total pork imports from 1.5m tonnes in 2018 up to 5.3m tonnes in 2021, helping offset the shortage of domestic supply after the African Swine Fever (ASF) crisis of 2018/19. 

“However, Chinese pig production has rebounded, and the USDA is now forecasting a 20% rise from 2020 levels this year, putting it at 80% of the 2018 pre-ASF level.  This recovery, coupled with high imports in the first quarter, saw wholesale pork prices in China halve between January and June, trading 7-8% above the 2016-18 average in July,” said Mr Macdonald.

With the balance between supply and demand changing, China’s imports began to fall back in April and May and UK exporters were not immune.  UK sales to China contracted, with May shipments slipping to a three-year-low for the month.  In China, market prices do tend to rise seasonally through the third quarter, and live hog futures prices are signalling that some muted seasonal recovery is expected this year; though not to the extent that would offset downwards seasonal pressure in the UK.

Outside of China, the Philippines was also hit hard by ASF and its pork imports are expected to surge to 450,000t this year from 167,000t in 2020.  Meanwhile, the USDA is also forecasting increased import demand from Korea, Japan and Mexico.  However, this demand is set to largely be met by increased exports from Brazil and the USA; the latter despite a jump in farmgate and wholesale prices making US pork less competitive on the global market.

“We can’t look at the pig market outlook without considering feed costs,” said Mr Macdonald. 

“After a very expensive winter and spring, which compounded the sharp reduction in farmgate values, futures prices are finally looking bearish into the autumn, with an improved global harvest forecasted.”

“Nevertheless, while prices reported by the Farmers Weekly point to wheat falling below autumn 2020 levels, barley is set to remain higher.  Soyabean meal futures are also signalling higher prices than in 2020.  Aside from feed, other costs are surging due to global logistical challenges and pent-up demand from the pandemic, so production costs seem likely to remain elevated at a time when market signals are pointing to a traditional seasonal pattern for farmgate pig prices.

“Even if prices were to follow their five-year average trend in the second half of the year, and non-feed costs were to rise by around 5% on 2020, reduced feed costs could still return producer margins to around breakeven,” concluded Mr Macdonald.