Rabobank Pork Quarterly

Transcription

1 Rabobank Pork Quarterly Q1 214 Rabobank International Authors Rabobank Pork Quarterly Outlook for Global and Regional Markets Albert Vernooij Chenjun Pan Will Sawyer Q1 214 Q4 213 was disappointing for the global pork industry, with an unexpectedly pronounced 7% drop in the Rabobank five-nation finished hog index resulting from the drop in imports to Japan (yen depreciation) and Korea (production recovering), and lower than expected Chinese import growth. Strong consumption performance (+2.1% YOY) and record beef prices supported US pork prices and processor margins, while hog prices and farmer margins were seasonally under pressure. While global grain production rebounded to an all-time high in 213, rebuilding global stocks, feed cost relief has largely escaped producers in Europe and Asia, keeping producer margins depressed. The hog price outlook for the remainder of Q1 and into Q2 214 remains robust despite falling feed costs and due to record beef prices. We could even see upside in 214, particularly if the impact of PEDv dents US production growth more than currently anticipated. Imports will remain under pressure in Japan and South Korea, while imports into China will show a lacklustre development due to the sufficient supply. Despite the lower prices, Q1 and Q2 pork industry margins will be positive as declining feed costs lift farmers margins while solid demand growth will support processing margins. Global overview The global pork industry had a generally good 213. The Rabobank five-nation finished hog price index averaged 151, an increase of 1% on 212 and the highest level in the last five years. However, the 7% seasonal decline in Q4 was more pronounced than initially expected; Q4 pork prices declined in all major pork producing regions with the exception of Brazil (see Figures 1 and 2). This was due to depreciating currencies in two major pork importing countries, Japan and Russia, and import bans imposed by Russia earlier in 213,, which capped exports and thus returns in the main exporting countries: the US, the EU and Canada (see Figure 3). The depreciation of the Japanese yen in Q4 forced hog prices higher and imports sharply lower (-1.9% Jan to Nov) in Japan. This was also the case in Brazil, where the price increase due to lower supply in 2H was supported by surging export value in Brazilian real terms. Sufficient domestic production and weak prices hampered the growth of Chinese pork imports, which dropped to 11% from January to November 213 YOY after the 25% surge in 212. In South Korea, the rebuilding of domestic production pressured imports, which fell 33% from January to October to levels last seen before the swine fever outbreaks in 29. The price outlook for the global pork market for the remainder of Q1 and into Q2 214 is steady. In combination with lower feed costs this will be positive for farmers margins. The modest growth in global pork production will largely satisfy rising consumption with some possible upside from the unknown impact of porcine epidemic diarrhoea virus (PEDv) in the US and the high prices of competing proteins. On the export front, Japanese and South Korean imports will remain under pressure, while steadily growing production in China and Russia will limit export growth potential for the main suppliers, the US, the EU and Canada, despite the generally more competitive international prices. The main wildcard in the global market this quarter is the impact of the PEDv outbreaks in the US and what this means to US pork production this year. Rabobank expects the impact to be more severe than forecast by the USDA and believes it will likely hamper US pork production growth in 214, especially in 1H. This might also pressure US export volumes, presenting opportunities for the other exporters. Into 2H and longer term, the main question is how farmers globally will react to the lower feed costs and the scale of industry expansion that will follow. In light of the margin pressure most farmers have endured in recent years, Rabobank expects global pork production growth to be measured and in line with demand as many producers are only beginning to get their heads above water. Figure 1: Global average hog prices (including QOQ and YOY growth) Q4 213 USD/kg Countries Q4 213 Q3 213 QOQ Q4 212 YOY Brazil % % China % % US % % Canada % % EU % % Source: Bloomberg, European Commission, USDA, 214

2 Rabobank Pork Quarterly Q1 214 Figure 2: Rabobank five-nation finished hog price index, Jan 26= Note: Average finished hog prices weighted by share of global exports (Brazil, China, US, Canada and EU) Source: Rabobank, 214 Figure 3: Index development exchange rates, USD to selected currencies. 14% 13% 12% 11% 1% 9% 8% 7% Source: Rabobank, based on Oanda, 214 Regional updates China Rabobank Index Average % In January 214, Chinese pork prices began decreasing (see Figure 4). Compared with the recent peak in September, hog prices had declined by 5.8%, to USD 2.49/kilogramme by the middle of January, which is slightly lower than in the same period in 212. Figure 4: Prices of piglets, live hogs and pork in China, CNY/tonne 5, 4, 3, 2, 1, EUR BRL RUB CNY CAD JPY Piglet Live hog Pork Source: Ministry of Agriculture of China, 214 Due to the weak pork prices and stable corn prices, the hog-to-corn price ratio began to decrease in the first two weeks of 214 after experiencing nine consecutive months of improvement from April to December 213. The ratio fell to 6.3:1 in January, meaning farmers with a sow-to-hog model could just break even. This reflects a significant reverse of farmer profitability compared with a hog-to-corn ratio of 7.9:1 in December 213. In some regions, farmers even began to make a loss. Chinese hog inventory (commercial hog inventory excluding sows) increased in the first 11 months of 213, but decreased 2.4% MOM in December and was down.5% YOY. Sow inventory from January to December 213 decreased steadily (see Figure 5). The recent decline of both hogs and sows suggests farmers increased liquidation following the low season after Spring Festival at the end of January 214. Hog inventory decreases in December reflect a seasonal movement. In contrast, sow inventory decrease in 213 can be viewed as a release of oversupply. However, the sow inventory level is still 1.9% higher than the average level of 21 to 212. Figure 5: Hog and sow inventory changes in China, Jan million head Source: MOA, Rabobank, 214 Chinese pork imports increased by 1.9% from January to November 213 in comparison to the same period in 212. The import volume decreased in the first quarter but picked up in the rest of 213. This change signals a positive and growing market for pork imports (see Figure 6). Figure 6: China s fresh, chilled and frozen pork imports, tonnes 1, 8, 6, 4, 2, Source: BOABC, 214 Hog inventory (lhs) Jan Feb Mar Apr May Jun Sow inventory (rhs) Jul Aug Sep Oct Nov Dec Germany accounted for 2.4% of China s imports in the first 11 months, with volumes up 31% YOY. The US slid to the number two position, with a 2.1% share, with volumes down 39% compared to the same period of last year (see Figure 7). Looking ahead, China s pork consumption is expected to remain steady in 214, while pork supply is expected to be sufficient, supported by the relatively high sow inventory. Pork prices are unlikely to move up significantly in 214. Despite the stable supply

3 Rabobank Pork Quarterly Q1 214 and demand situation, pork imports will likely continue to increase in 214 due to the more competitive international prices. Figure 7: China s pork imports by country, thousand tonnes United States Denmark Canada France Spain Germany Others Source: BOABC, 214 United States While US hog profit margins for producers and processors were far better in Q4 than at the start of 213, they declined significantly from the great results of this past summer. We estimate hog production margins to have averaged USD 5 per head in Q4, down from USD 22 in Q3, driven by a 13% decline in hog prices caused by seasonally higher production. Pork prices were more resilient than the falling hog prices, helping processors realise a USD 6 per head margin improvement in Q4 versus the prior quarter. PEDv began showing up in the US hog herd in late April 213 and is now widespread, with high litter mortality in every major hog production region of the US, which could impact 214 pork production by 5%. In the USDA Hogs and Pigs report, published 27t December, inventories of breeding hogs and litter rates confirmed the impact of PEDv that many market participants had feared. Despite the outlook for strong profit margins, the inventory of hogs kept for breeding was down 1.3% YOY, reflecting producers hesitation to expand in the midst of the outbreak. Newborn piglets are highly susceptible to the effects of PEDv. This was evident in the number of pigs per litter which was flat last year, the slowest growth rate in a decade. Low feed costs will incentivise producers to increase weights, but this is likely to merely offset the shortfall in hog numbers as a result of PEDv. Thus we expect US pork production to be flat to up slightly in 214 well short of the 3% plus growth we would have seen had PEDv not appeared. As such, the margin outlook for 214 remains quite positive with margins of USD 33 per head for hog producers, which would be the best annual results for the industry in more than 3 years (see Figure 8). This rosy outlook is a function of significantly lower feed costs, primarily corn, and strong hog prices as the market sees the outbreak of PEDv constraining supply growth in 214. The futures market for 214 implies a decline in prices of corn and soymeal of 27% and 15%, respectively, as global grain inventories rebuild following the robust harvests in the Americas. The USDA forecasts as much as a 6% decline in hog prices in 214, which in our view underestimates the industry s limited ability to increase supply in the midst of PEDv. Supply is also likely to be further constrained by the effects of new Country of Origin Labelling (COOL) requirements, which have significantly slowed the imports of Canadian hogs in recent months. Figure 8: US hog production margin, f USD/head Source: USDA, Rabobank, 214 In 213, US pork exports were hampered by ractopamine bans implemented by China and Russia and a slowdown in volume to Korea as it continues to rebuild its domestic herd. Looking to 214, while the US is still unable to ship pork to Russia, the industry has resolved China s ractopamine requirement and exports there have stabilised, ractopamine-free. Korea is expected to continue to rebuild its domestic production but the removal of import duties in 214 for the US (also to Chile) may help trade volume finally stabilise. The bright spot in 213 was trade with countries to the south, where imports were quite strong in some countries such as Mexico, Colombia, Honduras and Chile. Much of this is being driven by trade agreements signed in recent years, allowing the US to ship with zero or near-zero import duties. We expect a low single-digit increase in pork exports in 214, an improvement from the 7% to 8% decline in 213, but a far cry from the robust growth the industry has experienced in the last decade. EU (1.) (2.) (3.) (4.) Despite the increase in average EU hog prices to EUR 1.75/kilogramme (+2.9% YOY) in 213, Q4 has been disappointing for European hog farmers, with the seasonal price decline of 7.1% QOQ being sharper than expected (see Figure 9). Softer consumer demand and lacklustre export growth (+1.6% to 2.7 million tonnes from January to November YOY) were the main culprits. The latter was due to the combined impact of higher slaughter weight (+.3 kilogrammes to 89.3 kilogrammes) and a lower than expected decline of slaughter numbers (-.9% from January to October YOY). This shows the strong productivity increase in the EU as the sow herd was 4.4% smaller in December 212 and 2.4% smaller in June 213. Figure 9: EU hog prices, EUR/kg* f 215f Av *Reference price Source: European Commission, Rabobank, 214

4 Rabobank Pork Quarterly Q1 214 The lower hog prices combined with the slower-than-expected decline of feed prices pressured farmers margins from October to December after peaking in September (see Figure 1). This resulted in total 213 producer margins averaging just above break-even. For processors, the declining prices in Q4 resulted in some muchneeded margin recovery after the difficult Q3, which resulted in a slightly better 213 compared to the very difficult 212. Figure 1: Margin development, EU hog farmers, EUR/1 kg Margin Pig price Feed cost Source: Rabobank, European Commission, 214 Rabobank expects a positive H1 for the European pork industry. Lower feed costs and continued elevated price levels will support the recovery of farmers margins after the lows experienced in H This is due to a slightly increased EU pork production supported by the continuing strong productivity growth, and stable to slightly higher consumption and exports. The latter might perform even better than expected if the impact of PEDv in the US is larger than currently estimated, but the high value of the euro might limit the impact on pig prices. For the rest of 214, balanced production growth will be key. If expansion is larger than expected, the likely lower hog prices will erode the benefits of lower feed costs. Canada Jan Feb Mrc Apr May Jun Jul Aug Sep Oct Nov Dec Hog production margins in Canada were more challenged in Q4 213, averaging CAD -2/head versus CAD 3/head in Q3. While corn prices have declined with the harvest of the large North American crop, it will take another quarter or two before the high-priced grain from this summer is fully pushed through the system. The major driver of the decline in margins is lower hog prices, which declined 7.5% in Q4, albeit less than the 13% decline in the US. This is partly driven by the weakening of the Canadian dollar, which ended the quarter and 213 at USD.94, down from USD.97 at the end of Q3. The Canadian dollar has weakened further in January, improving the outlook for Canadian hog producers in 214. With Canada exporting two-thirds of domestic pork production, the free trade agreement (FTA) with the EU is expected to be positive for the entire industry. The FTA, signed in October 213, allowed for 8, tonnes or 4.5% of 213 Canadian pork production. While this is only a drop in the ocean of EU pork consumption, it gives Canada access to a market where it had almost no presence before and the opportunity to grow the quota in the future at prices better than other export markets. Despite the incentive for Canadian hog producers to increase shipments of pigs to the US, driven by low cost grain and the outbreak of PEDv, there has been a sharp decline in the number of hogs shipped in recent months. In October, Canada shipped 286 Av. 213 thousand hogs to the US, mostly piglets weighing less than 15 lbs, which is a 35% decrease from August. Shipments improved in November, but were still down 14% versus last year (see Figure 11). Figure 11: Canadian live export pigs to US, head 1,2, 1,, 8, 6, 4, 2, Less than 15 lbs More than 11 lbs 15 to 11 lbs Source: Agriculture and Agri-Food Canada, 214 The culprit of this trend is likely the impact of new COOL regulations, which went into effect in November and are even more stringent than before. As a reminder, the first round of COOL regulations went into effect in 28 when Canada was shipping nearly 1 million pigs to the US on an annual basis for feeding and processing. There has been a sharp and continued decline since then, and shipments to the US in 213 will likely not exceed 5 million hogs. This decline closely correlates to the challenging period of profitability in the Canadian hog sector and is likely in part related to the introduction of COOL, as well as the extended period of strength for the Canadian dollar in recent years. It is too early to tell the extent to which hog shipments to the US will fall this year, but it will undoubtedly put pressure on Canadian hog prices and profit margins for hog producers in 214, despite the softer currency. In the week of January 2, the first official cases of PEDv were confirmed in Manitoba, Canada s main pork production region. The USDA forecasts a 1% increase in Canada s pork production this year which likely isn t at risk since the virus mainly affects newborn piglets, but could impact supplies come 215. PEDv has been plaguing the US pork industry since April but it has only recently cropped up in Mexico and in Canada this week. Given Canada s position as the third largest exporter of pork, behind the US and EU, PEDv will limit the amount of pork available to the global trade in the next 12 to 18 months. Mexico Mexican hog producers continue on the road to recovery. During the past six months, producers have enjoyed positive and growing margins that allow some recovery from previous losses. As a result, most mid-sized and large producers are finishing paying past due debt and are beginning to reinvest. In 213, Mexican hog prices reached an average of MXN 25.5/kilogramme, higher than our forecast in mid-213 of MXN 23/kilogramme (see Figure 12). Previously, we had identified two factors that were supporting prices: First, the increase in US hog and pork prices, and second, solid domestic pork consumption trends. However, in addition to these factors, we believe pork prices achieved record levels because of the decline in the domestic swine herd towards the back half of 213.

5 Rabobank Pork Quarterly Q1 214 Pressure on the swine inventory came from some PEDv outbreaks in Central and Northwest Mexico which began around the third quarter of last year. However, as the industry is moving into positive margins it is investing heavily along with the government to implement very tight bio-security measures. This year, the Mexican government launched a new programme to increase the swine inventory through genetic improvements and improve pork meat quality to increase exports. If the PEDv is satisfactorily controlled and mitigated, we believe this programme could show some results on the swine inventory towards the end of this year. Figure 12: Mexican hog (cwe) prices, MXN/kg Av Source: Rabobank, Confeporc, 214 In 214, we anticipate Mexican hog prices to be well supported by US prices, good Mexican pork consumption and ongoing pressures on the domestic swine herd. Thus hog margins should be positive this year. Pork consumption in Mexico continues to perform well as pork has become very competitive against high chicken (breast) and beef prices. Furthermore, consumer perception is improving and pork is increasingly seen as a safe meat. In 214, we expect only a marginal increase in per capita consumption as a result of strong pork prices. At the end of the year, per capita consumption is expected at 16.7 kilogrammes, up from the previous historical high of 16.6 kilogrammes. In 214, high pork meat prices will encourage supply growth. However, as we anticipate limited expansion in the Mexican swine herd, supply growth will occur through imports. We expect imports to increase around 2.6%, while production may increase 1.5%. Thus, at the end of 214, we anticipate imports at 8 thousand tonnes and production at 1.3 million tonnes. The Mexican pork industry remains optimistic on gaining access to China. Talks continue between the two countries but it seems it may not happen as soon as is expected as there are logistics and sanitary barriers that need to be eliminated first. Mexican pork exports are expected at 12 thousand tonnes in 214, up from 11 thousand tonnes in 213. Brazil Brazilian hog prices surged into December due to the combination of a readjustment of supply in 2H after the price collapse that followed the Ukrainian embargo in 1H, the fact that the weakening real pushed export values above the world market price (USD) and good domestic demand into the holiday season, also due to high priced beef (see Figure 13). Even the strong decline in export volumes in Q4 (-16.5% YOY) did not dampen the price increase, highlighting the rapidly growing popularity of pork in Brazil. Figure 13: Brazilian hog (cwe) prices, BRL/kg Source: Bloomberg, CEPEA, 214 The strong prices combined with lower feed costs supported much-needed margin recovery for Brazilian farmers after high feed costs induced a difficult 212 and volatility in sales and prices in 213. In combination with continuing high domestic beef prices, the scope for more growth in pork export volumes as a result of the depreciated real and the modest but steady progress made in obtaining access to key import countries, such as Japan and the US, will support production recovery. Japan Japanese wholesale carcass prices surged after August, with average prices from August to November 213 up 25% YOY (see Figure 14). This development is due in part to the depreciation of the Japanese yen, which from January to December 213 was down 16.5%, 13.4% and 8.%, respectively, against the currencies of the main exporters of Europe, the US and Canada. Figure 14: Wholesale carcass prices in Japan, JPY/kg Source: ALIC, 214 Av Av As a result, total imports declined by 1.9% to 675, tonnes between January and November 213 YOY, with the US and Canada down 12.6% and 1.9%, respectively. Remarkably, imports from Denmark increased by 1.1%, showing the historically strong position of Danish suppliers in Japan. The strong prices supported an increase in Japanese pork production (+1.1% to 751. tonnes from January to October) and, in combination with declining feed costs, resulted in positive margins for Japanese pork farmers. However, processor margins are under pressure as pork retail prices (exc. tax) for loins (+1.%) and legs (+.1%) are showing only a marginal increase, while shoulder prices declined by.4% between January and November. With the Japanese yen not expected to strengthen in the first months of 214, Japanese pork imports will remain under pressure,

6 Rabobank Pork Quarterly Q1 214 supporting continuing strong hog prices. This will support some production growth, which will enter the market in 2H 214. South Korea The Korean pork market has returned to the situation before the devastating swine fever outbreak, which started in April 29. South Korean hog inventory is stabilising at 1.2 million head as of September 213, while pork imports are back at 21 levels. Pork imports in the first 1 months of 213 dropped 32.9% in comparison to the same period in 212 (see Figure 15). The US remains the key supplier, accounting for 2.4% of the total import volumes in the year to October. Into 214, the 5.8% YOY drop in the sow inventory in Q3 213, following efforts of both government and farmers, will result in lower supply in the course of Q1, which will support the further recovery of pork prices. Figure 15: South Korean pork imports, thousand tonnes Source: Korea Meat Trade Association, 214 Lower imports combined with stabilising domestic production in 2H supported the recovery of pork prices after they dipped in March 213. Despite the seasonal drop after the end of the barbecue season, hog/pork prices at the farm, wholesale and retail level increased to KRW 3,32/kilogramme (+12.2%), KRW 3,934/kilogramme (+3.1%) and KRW 15,34/kilogramme (+4.4%), respectively, in November YOY (see Figure 16). Figure 16: South Korean pork prices, KRW 25, 2, 15, 1, Av Rabobank International Rabobank Food & Agribusiness Research and Advisory Animal Protein Global Sector Team Analysts US Bill Cordingley bill.cordingley@rabobank.com US William Sawyer william.sawyer@rabobank.com US Don Close don.close@rabobank.com Argentina Paula Savanti paula.savanti@rabobank.com North East Asia Chenjun Pan chenjun.pan@rabobank.com Australia Lloyd Setter lloyd.setter@rabobank.com New Zealand Matt Costello matt.costello@rabobank.com EU & Russia Albert Vernooij albert.vernooij@rabobank.com EU Gorjan Nikolik gorjan.nikolik@rabobank.com EU & Russia Nan-Dirk Mulder nan-dirk.mulder@rabobank.com 5, Mexico Pablo Sherwell pablo.sherwell@rabobank.com Jan/8 May/8 Sep/8 Jan/9 May/9 Sep/9 Jan/1 May/1 Sep/1 Jan/11 May/11 Sep/11 Jan/12 May/12 Sep/12 Jan/13 May/13 Sep/13 Singapore Pawan Kumar pawan.kumar@rabobank.com Farm Price Wholesale price Consumer price Source: Korea Meat Trade Association, This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International ( RI ). The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction, nor is it professional advice. This information is general in nature only and does not take into account an individual s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. All copyrights, including those within the meaning of the Dutch Copyright Act, are reserved. Dutch law shall apply. By accepting this document you agree to be bound by the foregoing restrictions. Rabobank International Utrecht Branch, Croeselaan 18, 3521 CB, Utrecht, The Netherlands