Summary

Pork production costs

The pig farming sector in the Netherlands produces for an international market and has to deal with foreign competition with different legal and social preconditions for production. The development of the production costs plays an important role in determining the competitiveness of the Netherlands.

Commissioned by the Product Board for Livestock, Meat and Eggs, LEI has carried out an international comparative study of the production costs in pig farming in the year 2004. The cost increases expected as far as 2013 resulting from policy measures are also illustrated. The study also includes an indication for all countries of the potential offering price of two pork products on the European market, taking into account the slaughter and processing costs, transport and import tariffs. For this, only the costs incurred for the processing of a product and the transportation to the destination are looked at. The market value of the products was expressly not examined. A comparison was made between the following countries (with the abbreviations between brackets): The Netherlands (NL), Denmark (DK), Germany (DE), France (FR), Spain (ES), Poland (PL), the United States (US) and Brazil (BR).

Figure 1 shows the composition of the production costs for shoulder of pork (deboned and derinded) and pork tenderloin (defatted), delivered frozen (US and Brazil) or chilled to the German Ruhr region. The differences in sales prices are partly due to the primary production costs. Despite the relative high costs of housing and environmental costs, the Netherlands has the most favourable pig farming production costs in the EU, thanks to the high productivity. The US and particularly Brazil have much lower primary production costs.

Due to the import levy on shoulder of pork from Brazil and the US, the production costs including delivery to the Ruhr region from Brazil are approximately the same as from within the Netherlands; for pork tenderloin, it is in fact a little lower. The US is the most expensive potential supplier since although production costs are a little lower, this does not offset the import levies imposed.

The high primary production costs in Poland are fully compensated by the low costs of slaughtering and processing. Shoulder of pork form Poland can be supplied to the German market at a slightly higher price, and pork tenderloin a little cheaper.

Due to differences in the market valuation, the offering price for shoulder will in practice be lower than suggested here, whereas the opposite is true for pork tenderloin.

Approximately €0.11 per kg slaughter weight of the difference in production costs in 2004 between the Netherlands on the one hand and the US and Brazil on the other can be explained by EU policy measures. In particular, the costs of manure disposal are higher in the Netherlands.

For the Netherlands, the expected cost development as far as 2013 arising from EU policy measures will result in an expected increase of costs of €0.08 per kg, principally due to the costs of ammonia emission limitations and due to the compulsory expansion of the floor space per fattening pig. Policy measures will also mean an increase in the production costs in Germany (+€0.07), Denmark (+€0.04), Poland (+ over €0.02) and Spain (+ almost €0.02). In France, the increase in the production costs remains limited to less than €0.01 per kg.

Figure 1 Production costs for shoulder of pork and pork tenderloin delivery paid to the Ruhr region in Germany from the various countries (€/kg product)

For Brazil, a further structural economic development can be expected, expressed in an increase in wage costs, the further decline of child labour, the further stabilisation of the real and a reduction in the interest rate.

What the Polish pork sector needs is financing, professionalisation and the development of the infrastructure (quality of the roads). In Poland, the development of pig farming is expected not so much from large-scale integrations but rather from the better, large family farms. In addition, there will be scope for relatively large-scale piglet production, while the farming of fattening pigs generally is expected to remain small in scale. For the first 10 to 15 years, Poland will represent no direct threat for Western European pig production.

EU regulations regarding animal welfare in the production of pigs are not applicable as a requirement on imported meat. This gives other countries a potential advantage. If requirements were to be set for suppliers from outside the EU, these could mean the implementation of relatively simple and economical modifications in production. However, these modest additional costs would put pressure on the limited product volume that would actually be sold to the EU.

Trade liberalisation could lead to actual imports of meat products from outside the EU. This would put the profitability of the European industry under pressure and bring about structural changes in production. Even if no physical supply were to take place, the pricing pressure of the international market will exert influence on the price levels within the EU. The time schedule within which import levies are to be reduced and the speed with which the European industry can respond to this determine the future earning capacity and the structure and scale of the pork supply chain in the Netherlands and other Western European countries.

March 2009