International Pork Prices: August-September 2013 Review and Future Prospects

US Futures Stagnate, EU Prices Decline

Lean hogs front-month futures (for October delivery) increased by 5% between 15 August and 20 September on the Chicago Mercantile to end at US$0.91 per pound. According to the latest published data, EU Weekly Market Prices for Pig Carcass Grade E increased by 2% between 12 August and 9 September to end at €195.70 per 100kg.

Stronger Exports Underpin Revival in US Pork Prices

One of the reasons behind the increase in pork prices is stronger US exports. Shipments recovered in July to show their first year-on-year rise, of 2.1%, in 2013. This was partly down to a moderate decline in the value of the US dollar between August and mid-September, which helped to make US pork more competitive in international markets. Strong economic readings in Japan, the most important destination for US pork, played a positive role in the referred increase in exports. In early September, Japan revised upwards its growth data for the April-June quarter, adding to hopes of an economic recovery. The economy expanded by 0.9% during the period compared to the previous three months, translating into annualised growth of 3.8%.

In addition to stronger exports, warm weather during August and September drove domestic demand for pork, consumed during barbecues on social occasions.

Total Volume of Pork Sales in Japan 2007-2012

Source: Euromonitor International

Summer Season Boosts Pork Sales in the EU

The 2% rise registered in EU pork prices between 12 August and 9 September was down to a number of factors. Other than stronger demand during the summer season, tightening supplies also contributed to the increase. Pig numbers were reportedly lower, partly the result of the impact of the new welfare regulations which came into force at the start of the year. Prices were significantly stronger in Italy (+10%), which was a reflection of increasing demand for pork during the summer in this major tourist destination.

Collar Agreements to Reduce Exposure to Pork Price Fluctuations

International pork producers seeking to source their supplies between October and December might opt for over-the-counter agreements (OTC) to reduce exposure to excessive price fluctuations. One possibility, among many others, is to enter 3-month collar agreements with suppliers. Collar agreements allow fixing prices within a limit range – floors provide the lower limit and cap the upper one. In collar agreements, buyers continue to have the flexibility of buying at market prices within the range established while ensuring excessive price fluctuations do not distort their supply chain cost structure.

Fluctuations in excess of 3% over current October lean hog futures (US$0.91 per pound on 20 September) are quite unlikely as the grilling season ends and demand starts to slow. Currency fluctuations, however, especially of the US dollar, might have a distorting effect on spot prices. The bearish outlook for corn feed prices makes any strong upsurge in lean hog futures highly improbable. Collars with a breadth of 6% (including upper and lower limits) would provide a solid base against short-term volatility of spot nominal prices.

Collar Agreement Example: Reducing Exposure to Pork Price Fluctuations (October-December 2013)

Source: Euromonitor International
Note:  *Dummy Data