No Deal sow prices could still be higher than early this year
In March, we produced a report examining the effect of a No Deal Brexit on cull sow prices and pig farm profitability. Sow prices are at risk under this scenario, as sows carcases are typically exported to the EU due to a lack of UK demand. This trade would face tariffs if we leave without a deal.
However, cull sows make up a relatively small part of pig farm incomes. We concluded that while a devaluation in cull sows would be unwelcome, movements in finished pig prices, feed costs and physical performance will continue to be more important for producer margins.
This general sentiment still stands, though there have been some changes to the market landscape since March.
Cull sow prices have risen significantly. We now estimate the UK sow price is about €118/100kg. The full tariff on EU pig carcase imports is €53.6/100kg, 45% of the current price level. In contrast, early this year the tariff was about 80% of UK sow prices, which stood close to €70/100kg. Assuming the additional tariff burden is borne by the producer, farmgate sow prices would fall to about €64/100kg from the current level. This is about 57p/kg based on the current exchange rate (£1:€1.13). This still higher than some prices reported in January.
A TRQ is available for 15,076 tonnes of pig carcases, which reduces the applicable tariff to €26.8/100kg. If utilised, this could accommodate about 5 months of typical carcase exports. So, from November-March, prices might initially sustain at about €90/100kg, or 80p/kg, all other factors remaining equal, before declining further. Of course, the base price is likely to change over this period.
Another significant development since March is an improvement in pig farm profitability. The average cost of production for a farrow to finish operation during Q2 this year was 148p/kg. This meant producers were estimated to be breaking even on a full cost basis at the time. This has likely improved in recent months due to rising finished pig prices, and further declines in feed costs. The All Pig Price (APP) has increased by about 7p/kg since Q2, and so profits are probably around this level unless physical performance has worsened.
The devaluation in cull sow prices adds around a penny onto production costs. Again, all other things being equal, the industry should be able to weather this change at present. However, movements in finished pig prices may change this. With about 15% of UK production exported to the EU (sow carcases aside) more pertinent questions arise around balancing supply and demand for prime pork products. More analysis in this area will follow.