Heated international hog market cooling down

Rabobank quarterly hog report shows Russia ban and PEDv significant factors for the global pork market

 

The global pork market is likely cool down in the final quarter of 2014, according to the recently released quarterly report by Rabobank.

In the report, the bank’s Food & Agribusiness Research team said that, although the peak of the 2014 porcine epidemic diarrhea virus (PEDv) outbreak is past, the global pork industry faces another challenge from the Russian import ban affecting EU, U.S., and Canadian markets, which is resulting in a rapidly changing trade landscape.

"As Russian markets will not open again until July next year, the wildcard next year will be the possible return of PEDv this winter, cutting back available hogs for slaughter in 2015," said analyst Albert Vernooij.

Brazil will benefit the most from the ban while EU has suffered the largest drop by 9% with no sign of recovery. Even taking into account the positive impact of declining feed costs on margins, it will be a disappointing year for the EU pork industry, said Rabobank.

According to the report, PEDv’s impact on global pork production was smaller than initially expected, which pressured hog prices lower in Q3-2014.  Mexico suffered the biggest volume decline - estimated at 11%- due to PEDV.  Although the U.S. expected a 14% decline in production, the PEDv losses were offset by heavier carcass weight.   The net decline was 5.5% for the U.S.  The decline in Japan and South Koreas was considerably less at 2% and 4%, respectively.

The return of PEDv in the U.S., Japan and Korea is still the big question and the wildcard for the hog industry in those countries.

Regional Outlooks:

U.S.: PEDv induced surging pork prices where further supported by consumers trading down due to higher beef prices, thereby driving one of the highest margin periods in the industry's history.

U.S. hog producers’ margins averaged $76/head, one of the highest period in the industry’s history reported Rabobank. With favorable condition, U.S. producers are looking to increase production in 2015 and reported farrowing intentions from September through February support expansion.

Still, the fear that PEDv outbreak will be an issue this winter is a concern shared by the entire industry.

China: In China, pork prices climbed steadily driven by tight supply after sow liquidation.  Rabobank reported in August total hog inventory in China was 432 million head and sow inventory was 45 million head, down 10%.

Although pork prices are higher, Chinese hog farmers are not making money with local feed costs reaching record high in August.

China’s pork imports from January through August only grew 1.2$ year-over-year.  China’s imports are likely to continue to increase strongly for the remainder of 2014 and into 2015 as the domestic supply will remain tight.

Russia approved two Chinese companies, WH Group and Beidahuang to export pork will be positive for the country.

EU: The EU pork industry has experienced a very disappointing Q3-2014, deteriorating from July with the extension of the Russian ban to competing exporters in the U.S. and Canada in combination with pressured consumption.

Both consumption levels and export levels will remain under pressure for the remainder of the year. As result, hog prices will stabilize to a lower level.

Canada: Hog production margins were quite strong in Q3-2014, averaging $57/head. However, declining pork prices at the end of the quarter will cause profit margins to decline as well.

As stated in the report, the rising competition for other markets as exports were directed away from Russia - a situation which will likely continue until the ban is lifted- drove prices lower.

Like the U.S., PEDv will still be concern this winter and be the wildcard for its hog industry

Japan: In general, the pork market in Japan is doing well with consumption calming despite surging imports and higher retail price which resulted from the depreciation of the Yen against the U.S. dollar and high priced competing proteins.

Mexico: Slaughter numbers in Mexico are gradually recovering from the large impact PEDv had on its pork production.  Carcass weights remained at the same level as 2013, despite lower feed costs. Still, Mexican hog producers had record high profit margins this year.   

South Korea: A smaller than expected PEDV impact yielded higher than anticipated supply in South Korea.  After peaking in June,  hog prices dropped 11% in August but stayed 24% above a year ago.

Brazil: Brazil, on the other hand, had outstanding Q3-2014 with fresh highs for pork prices, with exports to Russia seeing 18% volume uplift representing almost 50% of Brazil's pork export value.

Rabobank predicts a positive outlook for the Brazilian pork sector for the remainder of the calendar year.  As Russia is likely continue to increase pork imports from Brazil in the first half of 2015, next year should also be a promising year for Brazil.

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