There may be trouble ahead for global pork trade
The global pork market has become increasingly turbulent in 2018. New tariff measures, the spread of African Swine fever, and a background of rising global production, have increasingly disrupted the normal patterns of trade. On top of this, elevated feed prices are anticipated in many regions, which could pressure margins and disrupt supply expectations moving forward.
Reflecting a challenging and uncertain outlook, global pork prices have been falling in recent months. Based on prices from the four major exporters (the EU, US, Canada and Brazil), the average pork export price averaged $2.55/kg in the second quarter, $0.08 lower than in Q1 and the lowest quarterly average for over a year.
Looking at the key exporters individually, Brazil has experienced the sharpest fall in price, with pork exports averaging just $2.03/kg in Q2, $0.11 less than in Q1. This reflects a sharp fall in global demand for Brazilian product, as Russia shut down imports at the end of last year. This significantly reduced Brazil’s export volumes, which fell 19% year-on-year across January-June.
The US has also increasingly struggled. While exports were actually 7% higher in first half of 2018, rising production and disruption to exports have weighed on the market. Exports are now beginning to slow in volume terms too, as tariffs limit shipments to China and Mexico.
In this context, the price declines recorded in the EU market this year have been relatively modest. The average EU export price in Q2 was $2.72/kg, $0.17 (7%) above the global average and just $0.07 lower than in the first quarter. Interestingly, even this modest decline was influenced by weakening of the euro against the dollar, and in euro terms export prices were actually stable across much of Q1 and Q2. EU exports have not experienced the same disruption as the other key exporters, so prices have largely been able to hold more firmly. Nonetheless, in June prices did drop down to $2.59/kg, in line with US levels.
What can we expect from these markets moving forward? How import demand plays out in China, in light of the recent African Swine Fever (ASF) outbreaks, could be key. Challenges are already arising from disruption to supply chains, with transport restrictions making it difficult to move pigs from the production regions of the North to the slaughter capacity in the South. If this continues, localised pork shortages may develop in Southern regions in particular, while Northern areas struggle with an excess of pigs. This could offer some import opportunities in the areas with tight supply. There is also the possibility that Chinese consumers will be concerned about the safety of domestically produced pork and favour imports where possible, despite ASF posing no risk to human health. Given the high tariffs on US pork, Brazil, Canada and the EU are better placed to benefit from any uplift in import demand at the moment, which may help support prices in these areas.
However, there are other factors at play that may counteract the potential improvements to Chinese import demand. Extensive culling, if ASF outbreaks continue, risks a short-term oversupply situation developing. This could be exaggerated by small-scale producers choosing to exit the industry, especially considering tariffs on US soybeans have elevated feed costs. Consumer demand for pork on the whole may also be damaged. Although Chinese pig prices have been rising recently, levels remain low, and reports suggest import opportunities have remained limited so far.
Aside from Chinese demand, how US trading relations develop will also be important. There seems to have been some optimism that relations may improve in recent weeks, with US hog futures rallying strongly in response to NAFTA talks. There have also been some suggestions that if the ASF situation in China escalates severely, US pork will be required to meet demand levels, despite the high tariffs currently imposed. It remains to be seen whether this optimism is well-founded. Currently, the US outlook remains significantly challenging, considering production is increasing but product is disadvantaged on both the Chinese and Mexican markets. Until/unless the situation changes, it will be difficult for US pig prices to lift significantly.
Brazil has also voiced some optimism around resolving trading relations with Russia, but again this remains far from certain. Given Russia’s track record with import bans, and the fact the ban is aiding local prices and growth in production levels, it is perhaps unlikely to be lifted any time soon. For this reason, Chinese and other Asian market developments will be particularly key for Brazil, which needs to find new markets for its pork.
The global pork outlook is perhaps the most uncertain it has been for a long time. While there are potential opportunities for the EU and UK pork market over the coming months, it is unclear if, and to what extent, they will materialise. It is important to remember the EU market is not immune to disruption, and indeed ASF is continuing to spread through Europe. It is perhaps only a matter of time until the disease enters one of the major exporting nations, Germany in particular, which would throw further disruption into global pork trade.
Bethan Wilkins, Analyst
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