Production costs reach 4-year high- producer margins at risk
The latest estimates from AHDB indicate that total pig production costs for Q2 2018 were the highest since early 2014. At an average 150p/kg, costs were only marginally below the average pig price (EU-spec APP) during the quarter, of 151p/kg.
Producer margins have been continually weakening since the middle of last year, as production costs rise while pig prices decline. Compared to the second quarter of 2017, production costs have risen by almost 9p/kg, while pig prices have fallen by 12p/kg. Margins have also tightened compared to the first quarter of 2018, although this entirely reflects an escalation in production costs (+5p/kg), as pig prices have actually increased slightly (+2p/kg).
The change in production costs between Q1 and Q2 has been largely influenced by rising feed costs, which account for around 60% of production costs overall. Unsurprisingly, rising feed prices have particularly influenced this increase, although poorer physical performance in some areas has also had an impact.
Looking in more detail at the production cost breakdown, it seems finishing feed prices in particular have increased. However, the impact of this has been mitigated by producers moving towards using less finisher feed, according to Agrosoft data for the 12 months to June this year. While this has had a detrimental effect on daily liveweight gain, feed conversion ratios for the finishing herd have actually improved.
Conversely, but perhaps related to this, the data also suggests rearer pigs have been fed more feed and taken to higher weights over the same period, with a longer spell in the rearing unit. As such, both the average daily liveweight gain and feed conversion ratio for the rearing herd have worsened. In addition, longer rearing times have had a knock-on detrimental effect on the number of pigs that can pass through a unit per year, raising the finance cost per pig. When combined with a higher post-weaning mortality rate (probably a result of the poor conditions this winter) this means finance costs have been the second largest contributor to rising production costs between the Q1 and Q2 periods in 2018.
Looking forwards, further increases in straights prices will mean feed prices have since escalated further. It also seems likely they will remain higher than in recent years over the coming months, reflecting challenges to harvest yields this year across the UK and Europe. On top of this, it seems difficult to anticipate too much uplift in the finished pig price, with global production levels on the increase. Although, global pork markets are quite uncertain at the moment, following from US trade tensions and the emergence of African Swine Fever in China.
Nonetheless, given that average producer margins were already extremely narrow earlier this year, it seems probable that on a full cost basis, some losses may be a feature of the UK pig market in the coming months.
While margins are currently eroding, producers have now experienced around 2 years of profitable pig production and over the past decade have theoretically been in the black almost 60% of the time. This highlights the importance of careful forward planning in pig production, enabling producers to weather more difficult periods.
The AHDB knowledge hub contains a series of articles to help producers make the most of feed purchased, in light of the risks to margins in the coming months. Click here to read more.
Also, look out for more articles and analysis to help producers make effective buying and management decisions in Pig Market Weekly in the coming weeks.
Bethan Wilkins, Analyst
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