Global Pork Prices Cave in to Downward Pressure
International pork prices followed the traditional downward trend that is typically registered after the Christmas season and remained unchanged/declined slightly in the most important export markets.
China is by far the largest producer of pork, with output forecast to total 52 million tonnes in 2013, according to the latest US Department of Agriculture (USDA) projections. However, production in this country is lower than consumption, compelling the country to import large quantities of pork every year. The European Union, the US and Canada remain the largest pork exporters at global level. Global pork sales totalled 91.5 million tonnes in 2012, according to Euromonitor International’s estimates.
Lean hogs front-month futures (for April delivery) declined by 7% between 22 January and 21 February on the Chicago Mercantile to end at US$0.82 per pound. A standard lean hog 40,000 lbs-contract turned therefore US$2,360 cheaper over the 22 January-21 February review period. EU Weekly Market Prices for Pig Carcass Grade E remained stagnant between 20 January and 17 February. The relatively bearish (pessimistic) approach to prices is challenging the widespread belief among analysts that weak output among international exporters will provide support for pork prices over the first half of 2013. USDA projects a pork output decline of 1% in both the EU-27 area and the US in 2013. The drought in the US Corn Belt registered during the second half of 2012 left US hog farmers
particularly vulnerable to higher grain costs. Lean hog production in this country is therefore projected to slow during the first of half of 2013. In the EU area, pork output is projected to decline on the back of rising feed costs and stringent EU animal husbandry requirements. These requirements are resulting in a restructuring of the industry, with the most inefficient commercial farms exiting production.
There is consensus that the decline in prices seen in February is mostly down to domestic factors, which are dampening hopes for a short-term rise in hog futures. This is because a snowstorm on the US East Coast and high stock levels of pork in the cash market slowed the pace of lean hog slaughtering, dampening demand during the best part of February. Weaker consumption after the Christmas season and the recent decision of Russia to ban chilled meat imports from Germany prevented further price rises in the EU cash pork market. In addition, data released on 13 February by Eurostat showed a 0.6% GDP contraction during the fourth quarter of 2012 in the euro area. This was regarded as a negative factor by traders, who are afraid of a potential slowdown in fresh meat consumption across recession-hit EU countries.
Lean hog traders could achieve hedging against risk in March by going long (buying) on call options (right to buy) at US$0.75-0.0.80 per pound. Short-term meat traders should be aware of volatility in the US dollar as appreciation of this currency might detract competitiveness to US exporters and put downward pressure on lean hog futures on the Chicago Mercantile.