Rabobank pork quarterly: growth constraints and tight supplies

While pork shipments increased to most markets in 2022, with strong growth in Mexico, South Korea, and the Philippines, China saw a substantial drop due to weak local prices and suppressed demand.

Looking into 2023, Rabobank sees limited upside potential for global trade due to the weak macroeconomic outlook and the supply and demand changes. Tighter supply in exporting countries (the US, Canada, and the EU) will likely limit global pork trade in the first half of the year. On the demand side, the report noted that rising inflation and high stock accumulated in 2022 in Japan and South Korea would pressure import needs. Meanwhile, higher pork production expected in southeast Asia in 2023 will mean fewer imports.

While feed grain prices have eased from the peak seen in Q2 2022, inflation, droughts, lower-than-expected ending stocks and harvest shortfalls in the US may cause prices to fluctuate. Meanwhile, soaring energy and transport costs are expected to ease. Labour costs will likely continue to rise given the need for wage and welfare increases.

African Swine Fever continues to spread in Asia, Europe and some other regions, and the disease remains a ‘wild card’, notes the RaboResearch report, also highlighting that PEDv remains a potential risk, and the effect of PPRS experienced in America and some European countries in 2022 may still be felt by the market. Biosecurity has improved worldwide, which has reshaped farming structures, particularly in Asia where many smallholders have been forced out of the sector, creating opportunities for large companies to expand.

December 2022 marked the first increase in the breeding herd in the US in 9 quarters at 2,000 head above the previous quarter and up 0.5% year-on-year (YOY). While this is a turning point in the sow herd, a rapid expansion is unlikely due to production costs and health challenges. The report also notes a 1% YOY increase in farrowing intentions in Dec-Feb 2023 and the 0.5% YOY increase in Mar-May 2023, which would drive higher production by the second half of 2023. Rabobank forecasts a 0.2% increase in pork production this year.

A backlog of about 800,000 pigs following recent storms and lacklustre pork markets is weighing on lean hog futures, now US$ 10 off their highs. Regarding trade, Rabobank expects a 4% improvement in export volumes in 2023, with steady sales to Mexico and a recovery in sales to China.

In Mexico, high costs continue to pressure growth. Nevertheless, current market conditions support Rabobank’s outlook of 3% YOY growth this year. Hog prices in Mexico remain historically strong (+19% YOY on average), helping producers offset higher feed costs (+11% YOY), which are still about 50% above pre-pandemic norms.

A record import volume of 1 mmt through September is up 13% YOY. Rabobank forecasts 2022 imports of 1.3 mmt and some moderation in 2023. The US remains the largest supplier (81%). Meanwhile, pork exports have slowed in recent months (-6% YOY) through September, with the sharpest declines to China (-84% YOY) and Canada (-70% YOY).

Despite a slight increase in slaughter in late December, Q4 2022 hog slaughter declined (-1.9% YOY), pushing YTD pork production down 0.8% to 2.2 mmt. Sharper declines in the west (-2.6% YOY) due to capacity and labour challenges more than offset the modest increase in the east (+0.5% YOY).

High operating costs will likely limit herd growth in 2023, with the breeding herd projected to drop 0.8% YOY. Hog prices are up 17% YOY, with stronger prices in the west and more modest gains in the east. Q4 2022 feeder pig exports dropped 11% YOY, while market hog flows rose 50% YOY. Pork export volumes were down 9.9% YOY in November. Double-digit declines in most major markets (except China), reflect competitive global markets and Canada’s relatively high pork price.

In December, domestic pig slaughter was 18.5 million head, up 0.9% YOY. Rabobank expects no meaningful expansion in 2023 pork production given high production costs and ongoing ASF risks (additional cases discovered in Q4 2022 and early 2023).

YTD pork imports of 527,000 mt are up 29% YOY. Declines in imports from the EU (- 11% YOY) were offset by an increase from the US, Canada, and Chile. Weaker economic conditions are expected to slow growth in the first 6 months of 2023, although the temporary reduction in pork import tariffs (through June) will likely improve trade with Brazil, Mexico and Canada.

China’s hog prices saw a 45% plunge between November 2022 and January 2023. Rabobank believes this will continue through Q1 and remains optimistic about the rebound in demand once the Covid wave settles. Should there be no other unexpected disruptors, the report anticipates hog prices to rebound strongly in Q2.

Pork imports in the first 11 months of 2022 declined by 45% YOY, to 2.44 mmt. Total imports for 2022 are expected to be 2.75 mmt. Since August, Brazil has surpassed Spain to become the largest supplier to China. Pork imports are expected to increase in 1H 2023 on a YOY basis and slow again in the second half of 2023. This year should see a slight increase in imports compared with 2022.

Since October, the foodservice in Japan has recovered to pre-pandemic levels, but household consumption is deteriorating due to inflation. In July 2022, Classical Swine Fever hit a large farm with a domestic share of 2.5%, which led to a 2.3% YOY decrease in live hog sales in October. January to March 2023 slaughter numbers are expected to be subdued at 2.6% lower YOY. Carcass prices are expected to stay stable in the first half of 2023 due to weak demand.

Meat inventories have been about 15% more than in 2021, 90% of which is imported meat. Refrigerated warehouses at ports are full due to forward purchases that anticipated a consumption recovery, so a significant increase in pork imports is unlikely for the coming months.

Vietnam’s growing economy (GDP up 8% in 2022) has supported pork demand, but disease outbreaks and rising input costs have challenged the profitability of the pork supply chain. Some smallholder farmers have exited the market, leading to consolidation – the top 16 farming companies now take 20% market share. In 2022, pork production was up 11.4% YOY, and this growth is likely to continue due to sow replenishment and investments, which could result in prices facing downward pressure. Meanwhile, Vietnam’s pork imports declined rapidly (nearly -40% in the first 10 months of 2022).

In the Philippines, pork production and herd inventory increased steadily in 2022, with pork production expected to accelerate this year. Pork imports saw a 28% YOY increase in 2022, driven primarily by strong local prices and the extension of tariff reductions. Spain, Canada and Brazil were the largest suppliers. Imports are expected to slow as local production increases.

Pork production in the EU27+UK was down by 5.1% YOY between January and October 2022 and is expected to continue a further 3-4% this year. While pork production was down in Germany (10%), Poland (9%), Denmark (5%), Spain (2%), France (2%) and the Netherlands (0.5%), it was up 2% in the UK on heavier carcass weights. EU27+UK pork exports declined by 18% YOY (January to October 2022). Seasonally lower pork demand is expected to be balanced by tightening supply across Europe in Q1 2023. Meanwhile, feed prices are expected to remain high in Q1, although the peak has passed.

Pork production in 2023 is expected to increase by 4-5% YOY. Pork exports in December were the second highest of the year, led by the recovery in shipments to China, which recorded the highest volume purchased in the year (54,000 mt). Even with the improvement in shipments, the total export volume in 2022 fell by 2% YOY.

China remains the leading destination for Brazilian exports (42% of total volumes sold). This is expected to continue in 2023 and its competitiveness should support share growth. As a result, Rabobank expects a 2% YOY lift in export volumes this year. Due to geographic proximity, animal health is another important risk factor for pork production in 2023 with Haiti and the Dominican Republic having reported ASF outbreaks.