Rabobank Pork Quarterly: Promising Outlook for H2 of 2013

GLOBAL - The global pork sector has experienced a stable first quarter in 2013, with supply and demand more or less in balance, resulting in stable prices for the Rabobank five-nation finished hog price index.
calendar icon 12 April 2013
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This stabilisation, in combination with the slow downward pressure of feed prices and the adjustment of most sales contracts to the new price levels—and despite the relative lacklustre demand development—gave the industry momentum to regain part of the margins lost in the last couple of years. However, at the farmer level, the lower than expected hog prices limited the earlier upswing of margins where it was hoped for.

Albert Vernooij, Rabobank analyst, commented: “For Q2 2013, the already difficult market will be further hampered by the numerous import bans that startled the industry in Q1 2013. Without questioning the legitimacy of these trade distributions, these will further limit possible upside of the market, which can be characterised by the combination of lacklustre demand and rising supply. The only positive note is that herd expansion will be postponed or herds will even decline, which together with the forecast declining feed costs, will likely result in better margins at both the farmer and industry levels.”

“In the Northern Hemisphere particularly, both domestic and export pork demand is going to be the determining factor in the coming months,” Dr Vernooij added. “In the EU, consumers are increasingly feeling the impact of the economic crisis in their wallets, while the higher pork prices of the last year are increasingly reflected in retail prices. In the US, retail prices held up well in the face of the decline in hog and pork prices. In both regions, the length and intensity of the grilling season will be modifying for profitability, especially because the early Easter was rather disappointing for sales.”

China, the US and Russia saw pork prices drop due to increased availability which more than offset the slow developing demand. In China, production recovered more quickly than earlier forecast, while in the US the expected production decline did not commence as productivity continued its steady growth and exports slowed due to the strengthening of the US dollar. In Russia, new capacity and higher imports resulted in surging supply. Prices stabilised in the EU, pressured by the declining demand and exports, while in Brazil an unexpected increase was experienced in January, followed by a lower than normal seasonal decline.

With the growing importance of Chinese and Russian imports, combined with the growing export dependency in the US and EU, it appears the seasonal trends in the pork market in the Northern Hemisphere are reversing with strong export demand and high prices in the second half of the year and a difficult market in the first half. If this development continues, Rabobank believes the impact will be huge for the pork industry in the Northern Hemisphere. This will be apparent not only in the changing seasonal price development, but also in the carcass valuation, which differs between the Northern and Southern Hemisphere and between spring and autumn.

In line with this possible structural development, 2H 2013 offers better prospects, with forecast large production drops in the EU resulting from the implementation of the sow pen regulations in January and the expected seasonal growth in import demand in China.

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