Quarterly update: Confusion reigns in pig markets

To recap and update: On 1 March, US tariffs on steel and aluminium imports were announced. On 23 March, the new tariffs came into effect. On 2 April, China announced retaliatory tariffs levied on more than 120 US products. US pork was singled out for 25% tariffs (along with fruits, nuts, wine and ginseng).

Levying tariffs on US pork

On 5 June, Mexico announced that it would levy tariffs amounting to about US$3 billion on American pork, steel, cheese and other goods. A 10% tariff on US pork, would take effect immediately rising to 20% on 5 July. These tariffs are on unprocessed pork (not including variety meats) in retaliation for tariffs on its metal exports to the USA.

The Mexican government has said that it has created a quota for 350,000 tonnes of shoulders and legs that can be imported without tariffs, but this quota is not available to US exporters. It has also said that it expected European suppliers to fill the gap from previous US sources.

Canada said it will match Trump’s 25% tariff on Canadian steel with a 25% tariff on various US steel products. And it will impose a 10% tariff on 84 other US products on 1 June. All of these actions and reactions in the commercial landscape for global trade in pork are important – and will have direct and indirect effects.

Mexico: The largest volume market for US pork

In 2017, Mexico was the largest volume market for US pork exports at about 800,000 tonnes and $1.51 billion value. China’s demand for US pork and pigmeat is not as large as Mexico’s and its volume of imports has been dropping since late 2017/early 2018, but it still accounted for about 15% of the total volume of US exports in 2017.

The chart below shows how weekly US exports of pork have decreased in 2018. It’s a stark contrast with 2017 and 2016. It’s not at all clear that the cutbacks shown here are directly related to the recent tariffs on US pork levied by China.

These only came into force in early April and that is at the end of the period shown. Also, China’s imports of the 5^th quarter products (variety meats) from the USA are more important than the imports of primal cuts. At the moment no tariffs are being levied on this category of pigmeat imports.

Figure 2 – Weekly exports of US pork to China, Jan 2016-May 2018.

Bearish about global pig prices

In my previous articles in Pig Progress I have been bearish about global pig prices in 2018 and I have suggested that caution should be the theme for producers and traders this year. Pig prices in the major markets have been weak or falling in Europe and have only recently made any sort of seasonal recovery.

In the USA hog prices have also been weaker than last year but have managed to stay on the seasonal track (just). Indeed, US hog prices have been surprisingly robust in recent weeks but the futures market is beginning to diverge from the spot market as traders take a gloomy view of President Trump’s tweets on tariffs and the impending (autumn) hike in hog slaughter levels after the summer BBQ fest.

Figure 3 – US daily hog prices, 2015-June 2018, $/cwt dead weight.

China: Unclarity about size of pig herd

Looking across to China no one knows how many pigs there are in the Chinese pig population – or its rate of growth- but we do know that there are numerous reports of large scale producers expanding and we know that China’s imports of pigmeat have declined rapidly in 2018.

And we also know that imports are likely to fall faster and further if trade is hampered by new tariffs on trade, albeit EU producers will try and make up any shortfall from the USA. The price chart for Chinese hog prices shows how Chinese deadweight prices have collapsed and the implied over supply behind this collapse is supported by reports of increased kill numbers.

There is some good news though – the weekly rates of decline in prices have now reduced and this is the first sign of a turning point in the Chinese pig price cycle. I believe we are reaching the bottom of the current downward phase of the Chinese hog price cycle.

Figure 4 – Chinese hog price, 2009-June 2018 (deadweight, weekly).

Europe: Pig prices adapt slowly

In the Old World, Europe’s pig prices have been slow to show any sign of benefit from the trade war rhetoric and it may be the EU’s bad luck to get a competitive edge on US pigmeat in China just when Chinese demand for imports is slowing.

And China is a very important market for the EU – China took over one third of all EU pigmeat exports in 2017. (The dominance of China in the EU’s customer base is equivalent to the Mexican market for US exporters. Each of the 2 big global pigmeat exporters has one customer that accounts for 1/3 of its export sales.)

Figure 5 – EU pig prices (class E), May 2004-June 2018.

Summary and forecast for pork markets

That brings me to a summary and a forecast of where this is all heading. One thing is clear – it’s not clear. And it is this uncertainty about how these various tariffs and trade restrictions underlines my point about caution. The trade war headlines add confusion on top of the normal fog of Chinese hog numbers, European census returns, etc.

For producers everywhere their pigs are already in the pipeline and they can only hedge via futures and/or hope that their packer customers will stick by them as the 2018 market plays out. For packers and processors the uncertainty of global trade brings risk and opportunity. Some may win big time if their plants can gear up for extra hog numbers and their sales departments can find the customers.

Figure 6 – Global pig price cycle, March 2013-June 2018.

I will close with a reminder of what the underlying numbers are saying. The global pig price index which is constructed from the prices of pigs in the major experts’ markets is signalling a downturn in 2018. But there will be variation around the trend!