Rabobank: pork prices will recover slowly in 2016

Chinese pork consumption continues to slow but a reduction in the herd could still mean a year of recovery for exporters in the Americas and Europe.

Rabobank’s latest quarterly pork report suggests a year of slow recovery for international traders, with production at an all-time high at the end of last year and the US exporters still facing challenges but in control of price levels.

Europe, where about 20 percent of the world’s pork is produced, “still has relatively high production but the cull last year has reduced that,” one of the report’s authors, Albert Vernooij, told Agri Investor. “A farmer puts all their efforts into sows so that had to change.”

Vernooij said that while the European culls also indicated that many pig-farming businesses may have had to close or reduce operations last year, the slightly reduced herd numbers should lead to a slow recovery in prices over the first two quarters of 2016. Profits in the summer of 2014 rose when PEDv outbreaks hit US herd numbers, and were followed by culls in Europe.

The strengthening of the US dollar will also give exporters in the EU and Brazil a competitive edge over the US in China, although expected depreciation of the renminbi could reduce imports into the country and push prices down. At the same time, a smaller herd in China could also drive up import levels.

In the US, herd recovery will put pressure on international export prices, but their continued growth will be limited. Exports from the US are expected to increase slightly following the re-listing of processing plants for export to China in the country. Congress’ repeal of the Country-of-Origin Meat Labeling rules should also help by preventing retaliatory tariffs from Canada or Mexico, according to the quarterly. The US produces about 9 percent of the world’s pork, in third place behind China and Europe.

“Capacity is nearly at its maximum though, so pressure on prices will come but be limited,” Vernooij said. The strengthening of the US dollar will also give exporters in the EU and Brazil a competitive edge over the US in China, which the world’s biggest importer as well as producer.

Prices in China have risen to 18 renminbi a kilo, up 30 percent since the same time last year, and while consumption is still growing it is at an increasingly slow pace. The shift from small pig farming to larger-scale farms in the interior of the country have also led to a temporary drop in the country’s herd numbers. That was due to changes in environmental as well as health and safety regulations last year. Sow and hog numbers fell by 10 and 12 percent by November 2015 compared to a year earlier, while demand will spike temporarily this month because of the Chinese Spring festival.

However, Chinese consumption patters are changing. “The decline in eating in restaurants is because of the anticorruption measures in China. Oficials can no longer eat out so much with it paid for by the government, and the effects of that will take two years or so to stabilise,” said Vernooij.

“There are also health and safety concerns in that market,” he said, adding that as countries get richer, the levels of poultry consumption tend to go up faster instead, as customers perceive it to be healthier.

In the US hog prices have been strong because of the strengthening of the dollar, lack of PEDv and West Coast pork slowdowns, said Rabobank. However, prices could decline significantly, even by as much as 30 percent by fourth quarter of this year, meaning average losses of $12 per head for producers. “Any boost in hog prices – and thus producer profitability – will stem from stronger exports,” says the report.

Meanwhile, exports from Mexico are forecast to increase, and Brazil, with the domestic market in the south American country also expected to increase its consumption as beef supplies there fall.