A disappointing June; an uncertain future

Since our last update, there have been four market sessions in Spain: in the first, the price of live hogs rose by 2 cents per kilogram, and in the other three, prices remained dishearteningly unchanged. June was a very disappointing month.

On Wednesday, June 10, the German market fell by a significant 10 cents per kilogram (carcass weight). Even before this drop, its price was already lower than Spain’s. That decrease nipped in the bud any possibility of Spain's price increasing. The German market continues to hold the de facto title of Central Europe’s leading market: what happens there has consequences throughout the EU.

The current price in Spain is 1.31 euros/kg live. This is below the cost of production. This will most certainly be the highest price of the year. And more than seven months have already passed since mid-November, when the price fell below the cost of production for the first time in years.

Right now, the market situation across the entire EU is worrisome and alarming. There is a massive surplus of pork, and freezing it is not an option (pork prices are bound to fall—there is too much of it).

China is in the midst of an overproduction crisis: half of the world’s pigs are concentrated there. Chinese pigs are now worth half of what they were worth in August two years ago (slightly below the current Spanish market price), an unmistakable sign of an oversupply of animals. Furthermore, the purchasing power of Chinese consumers is being affected by various economic upheavals, and consumption is suffering as a result. China is the world’s leading producer (by far); when it faces problems, as it does now, these spill over—in one way or another—to the rest of the world’s producing countries. This is especially true now, in an increasingly interconnected world.

With China reducing its reliance on imports and emerging economies pursuing aggressive trade policies (Brazil and Russia are among the most prominent), European pork is facing greater-than-usual difficulties gaining a foothold in the world’s largest market and in Southeast Asia in general.

As if that weren’t enough, ASF remains active in both Spain and Germany, the EU’s two leading producers. This is another factor that is tangibly weighing on the market. Note: this is by no means the only negative factor. We believe that a multitude of negative factors have converged. Prices in Spain were already below cost before the disease emerged.

We cannot recall a situation as dire for the swine industry as today's. Not even between 1986 and 1989 (when Spain was already a member of the EU, could not export, and Europeans, on the other hand, could sell in Spain) did the outlook seem as bleak as it does right now. Back then, Spanish production was less than half of what it is today (22 million pigs slaughtered in 1989—according to 333—compared to more than 50 million in recent years). The Spanish pig herd's large size magnifies the problem.

The price in Spain remains firmly at the top of the list as the highest among European Union member countries (with the exception of Italy, which is in a league of its own). Let’s look at the current equivalent prices in euros per kilogram of live weight for the most significant countries:

Spain	1.31
France	1.30
Belgium	1.19
Poland	1.18
Germany	1.17
The Netherlands	1.10
Denmark	1.03 (*)

Note (*): Remember that Denmark has a “settlement price”.

Everywhere we look in Europe, we find prices that are cheaper (or much cheaper) than those in Spain. This observation confirms that the crisis is affecting all of Europe.

Although the supply of live hogs is moderate, the inability to raise pork prices is preventing any upward movement in hog prices. The slaughterhouse has no profit margin and is scaling back operations.

There seems to be no other solution than to reduce European herds significantly. In some countries, government plans are already in place or are being finalized to encourage the abandonment or reduction of pig farming. It is the only way forward, but it will take time.

Since the EU pork market is completely saturated and exports are facing all kinds of difficulties… it seems inevitable that we’ll spend the rest of the year on the edge of our seats. No matter how cheap pork may seem (whether live or as meat), the worst is yet to come, and price drops seem inevitable and certain.

We are in the midst of a crisis. It is profound, is expected to be long-lasting, and is likely structural. There are no magic solutions to avoid it: we have no choice but to face it and try to limit the damage.

We think this is a good time to bring up a saying from the collection of Spanish proverbs: “The longest day must have an end.” At the same time, we would like to highlight a quote from Dieter Uchtdorf: “It is not adversity itself, but your reaction to adversity that will determine the course of your life”

Guillem Burset