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LIVESTOCK MARKETS: Trade, disease, feed weigh on global pork pictureLIVESTOCK MARKETS: Trade, disease, feed weigh on global pork picture

Rabobank forecasts potential weakness in near-term returns.

Krissa Welshans 1

April 26, 2018

6 Min Read
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Uncertainly in global markets, particularly as it relates to disease risk, trade disputes and feed availability, will create both opportunities and challenges for the pork industry in the coming months, according to Rabobank’s newly released “Pork Quarterly Q2 2018”.

“Impacts of the China/U.S. trade dispute will distort markets and weigh on pork values in North America while creating some potential upside for producers in Asia, Europe and South America,” the report noted. “The potential escalation of the dispute — along with ongoing NAFTA (North American Free Trade Agreement) modernization talks — creates a heightened sense of risk.”

In addition to trade disputes, Rabobank pointed out that the threat of African swine fever (ASF) spreading in Europe also creates uncertainty.

“Global herd health issues have the potential to slow pork production and disrupt traditional trade flows,” Rabobank said. “While no current outbreak is expected to have the distortionary impact of (avian influenza) in poultry or (bovine spongiform encephalopathy) in cattle, the spread of African swine fever into Central Europe is generating some concern.”

Export-dependent countries in the European Union have been moving quickly to prevent disease spread, the report added.

With no vaccine and no effective treatment, mortality rate of ASF is close to 100%.

Rabobank said the near-term risk is that the disease spreads into more densely populated commercial production regions in the EU, which would result in interrupted trade flows.

“Given the proximity of current outbreaks, we believe Germany and Denmark are most at risk,” Rabobank noted.

However, given the disease’s ability to also be carried in contaminated pork products, Rabobank said there is no guarantee that ASF will be contained to only neighboring countries.

Due to the severity of the situation, the report pointed out that EU and international animal health officials have a coordinated effort to prevent cross-border transmission via live animal and processed meat products.

All things considered, the Rabobank Five-Nation Hog Price Index shows a softening trend, suggesting potential weakness in near-term returns.

Regional updates

In China, Rabobank said a 30% year-over-year decline in hog prices and an oversupply has been pressuring margins. While a newly enacted 25% tariff on U.S. pork imports has provided some support in the near term, this will not fully offset the market pressures. Additionally, the report noted that tariffs on U.S. soybeans will also affect Chinese producers' bottom lines.

“We expect losses to continue but gradually improve as the industry right-sizes production,” the report stated, adding that pork demand will remain good due to spring festivals and cheaper costs.

According to Rabobank, a surge in exports to Hong Kong and China is helping Brazil offset lost access to Russia's pork market, which has been its primary export market. However, Brazilian producers continue to struggle with weak pork prices and higher feed costs as a result of a moderately poor growing season. Consequently, Rabobank expects slower production growth in the year ahead.

As for the EU, Rabobank said production growth and weaker exports are expected to limit the upside in margins this year.

“Gradual growth in pig herds reflects good returns over the past year and a rebound in productivity,” the report noted.

In terms of exports, the report said the EU is not expected to see a big rise in demand from China but added that some growth to Japan and South Korea should occur.

As stated earlier, ASF concerns will weigh on the market.

According to the report, Russia’s pork production is near self-sufficiency and is expected to experience additional growth in 2018. Nearly nonexistent imports, good hog prices and depressed feed costs have made production very profitable. “With the tremendous growth in production, Russia is now considering the potential for exports,” the report noted.

Plus, while it initially focused on nearby countries like the Ukraine, Rabobank said Russia has also targeted Asia and is now establishing new relationships in Hong Kong and Vietnam.

Hog production in Mexico started the year strong and is poised for even greater growth as the year progresses, the report noted, adding, “Margins have been strong for Mexican producers in recent months, yet they have dropped from the year-ago period as supplies have increased substantially and as U.S. markets have weakened.”

Rabobank said incremental growth in domestic demand is expected but may be limited by competition from other meats, Mexico's elections in July and the ongoing NAFTA negotiations.

For Canada, Rabobank reported that hog inventories were up 2.7% in the first quarter of 2018. Limited growth in the sow herd in 2018 is expected, but conditions are becoming more favorable in the longer term, the report added.

“Fewer growth restrictions, good demand for weaned pigs from the U.S., recent packing capacity additions in the U.S. and Canada and good demand for high-quality Canadian pork exports to Asia are all signaling a return to growth,” Rabobank said, adding that the only limitation will be price.

Production margins have recently dropped below breakeven, and like the U.S. and Mexico, Canada’s prospects hinge on a favorable conclusion to NAFTA negotiations, Rabobank said.

Trade issues and rising pork production will remain the focus for the U.S. pork industry, especially as demand has softened and feed prices rise.

“We see little immediate change in production plans, as the industry has built a financial war chest to withstand the current downturn,” the report noted.

Rabobank said it remains comfortable with its forecast of 3.8% growth in hog supplies.

However, further increases to production may be reconsidered until there is a clearer picture on where both NAFTA and trade negotiations with China are headed, the report suggested.

Market recap

June live cattle futures were mostly higher this week before falling Thursday. Contracts closed higher Monday at $104.875 and Wednesday at $105.575 before losses negated the gains by Thursday’s close of $104.35/cwt.

May feeder cattle futures were mixed this week, closing higher Monday at $140.60 and bit lower Thursday at $140.30/cwt.

The Choice and Select beef cutouts closed higher at $220.08/cwt. and $204.48/cwt., respectively.

May lean hog futures were mostly lower, closing Monday at $76.370/cwt. and Thursday at $74.00/cwt.

Pork cutout values were mostly lower this week. The wholesale pork cutout closed lower at $67.85/cwt. Loins were higher at $71.54/cwt., while hams were lower at $52.88/cwt. Bellies were also lower at $83.66/cwt.

Hogs delivered to the western Corn Belt were higher, closing Wednesday at $58.20/cwt.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on April 20 at $1.0725/lb.

According to USDA, egg prices were steady, with a steady to lower undertone. Offerings were light to moderate, while supplies were mixed. Demand was light to mostly moderate.

Large eggs delivered to the Northeast were unchanged at $1.29-1.33/doz. Prices in the Southeast and Midwest also were unchanged at $1.40-1.43/doz. and $1.24-1.27/doz., respectively. Large eggs delivered to California were unchanged at $1.96/doz.

For turkeys, USDA said the market was steady to firm. Offerings and demand have been light to moderate. Prices for hens and toms were unchanged at 75-84 cents/lb.

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