A sad, stubborn, and dejected reality for the Spanish swine market

In our previous commentary, we assumed there would be a gradual increase in the Spanish pig price during May. This has not been the case. The reality is that May began with a sharp decline in Germany; this collapse prevented the bullish forecasts we made a month ago from materializing. The price there fell by 10 cents/kg carcass weight on the 6th, settling at an equivalent live price of €1.25/kg, slightly below the Spanish price for the first time in many months. The pig price falling in the middle of May... is not the norm: a reactivation of consumption is expected and, consequently, an upward trend. The German price drop has been, in itself, irrefutable proof of the current exceptional circumstances.

We have been confronted with a harsh reality. The outlook is bleak and despondent. The facts are undeniable. The EU's self-sufficiency rate is 125%, and with some third-country markets closed to Spanish pork, Spanish producers have sold significantly more in Europe than usual. Furthermore, Spanish pig slaughter has been particularly abundant this year, leading to an increased supply of pork in an already saturated European Union.

The timid (and hard-fought) price increases at the last two Spanish market sessions can be attributed to the restrained supply. When African swine fever (ASF) appeared in Spain, piglet imports slowed, and uncertainty halted the usual import flows. These pigs are now missed. This factor, combined with the warmer weather, will contain the supply and may support further (albeit modest) price increases. It doesn't appear that the upward trend will be very significant: we started the rise very late, and the pork market is practically knocked out, showing some rather alarming signs of weakness.

The Philippines has announced the reopening of its market to Spanish (and German) pork this May (accepting the principle of regionalization). This is very good news. Access to this market will act as a partial outlet for a depressed and sluggish intra-EU market.

Currently, the Spanish price—even with ASF—is the highest in the EU among countries with significant production. According to Mercolleida, the current prices, expressed in euros/kg live weight, are as follows:

(*) The price in Denmark is a “settlement price”.

It can be inferred that pig production is operating at a loss across most of Europe (the estimated cost of production is around €1.37/kg live weight). Spain has "exported" its problem to the rest of the EU. For many months now, we have worked with a selling price below the cost of production; the weeks are passing, and the losses are piling up.

If we try to analyze the market coolly and objectively, we realize that reversing the current situation will be anything but easy. Powerful stimulus measures are needed, and these are nowhere in sight. We greatly fear that the situation will worsen as summer progresses.

Living with pig prices below cost is unsustainable; problems will inevitably arise, and with them, tangible consequences of this long period of hardship. Time will reveal the extent of these consequences.

The nature and persistence of the current deep crisis show that we are at a paradigm shift: we now assume that pig production within the EU will continue to decline and that industry consolidation will progress further. We are likely to move from a self-sufficiency rate of 125% to around 110%, or perhaps even lower. This reduction in production will take place across the EU, not only in Spain.

We believe that the only way pig prices (across the EU) can recover is through a significant reduction in production. That will take some time.

The summer that's about to begin is expected to be problematic; there won't be enough pigs to maintain the slaughter schedule, and many slaughterhouses have already finalized their contingency plans to deal with this situation: slaughtering one less day or reducing normal working hours. With their backs against the wall, there are no other options.

As pig prices remain firm for now, while pork prices continue to decline (and bleed dry), slaughterhouse profit margins are shrinking and steadily heading towards negative territory. With weekly losses, slaughterhouses will have little incentive to slaughter, and the upward pressure (due to a lack of supply) will dissipate because of the lack of incentive to slaughter.

We are very sorry that the current market situation is so negative. Our role, however, is to explain the facts and try to understand them. It is what it is, and at the moment, it is necessary to present the reality of the situation, however stark it may be.

There are no significant events to note in the wider world: in Japan, the pig price is falling very rapidly (although this market is currently closed to Spain); in the United States, the price remains firm; and Brazil is evolving as usual: around €1.00/kg live weight (very close to the cost of production there).

As a reminder that achieving our goals always requires perseverance and determination, we will conclude today with a quote from Khalil Gibran, the multifaceted Lebanese artist who made his home in the United States: “No matter how long the storm lasts, the sun always shines behind the clouds.”

Guillem Burset