The margin of pig farmers continues to deteriorate in Brazil

As described in our latest newsletters, the first semester will be the most difficult period of the year for the sector, considering that pork consumption is historically weaker due to seasonal effects, possibly scarcer imports by China, the level of Brazilian production, and the cost of animal nutrition. The level of live pig prices has advanced in the country over the last 12 months, as can be seen in the attached graph, with difficulties along the way, such as the withdrawal and bankruptcy of a portion of independent pig farmers, those with a more fragile financial structure.

The current scenario is a little better than the one registered a year ago, even if the situation is still difficult, with production adjustments taking place, in a “forced” way due to prolonged contact with losses by a large number of producers since the beginning of 2021. One of the major problems of the activity is the sudden ups and downs in prices, which also occurred in the first 30 days of this year. Retailers often take a more withdrawn attitude toward purchases due to the level of stocks, and as a result, meat-packers are put under pressure with carcasses and sausages, a situation that quickly affects the live meat market. When stocks are leaner, price highs also happen rather quickly.

Production adjustment is a long process due to the production cycle. Slaughter in 2023 must reach 47.92 mln head, according to SAFRAS & Mercado, up 1.48% from 47.35 mln head last year. The pace of growth is losing steam, which is positive. It is worth mentioning that from 2021 to 2022, there was a 2.18% increase.

The cost of production remains at high levels, a scenario that must lose strength only in the second half of the year with the entry of the second-crop corn in the market, should the crops show good development. In this sense, the climate needs to be closely monitored. Corn is the main component of feedstuff. Over the coming few weeks, the soybean harvest and logistics must intensify, which will affect corn. The soybean harvest is at record levels, and transportation will be a major challenge, with the expectation of increasing freight rates across the country. It is also worth noting that the carryover stocks of corn are short due to Brazilian record exports, which is also a price support variable. On the other hand, the price level of soybeans and meal must retreat during the semester.

With high costs and deteriorating margins, pig farmers must continue negotiating lighter animals in the coming few months, which can help pork availability and price formation. However, it is worth noting that exports are also an important variable in the composition of domestic availability. As for exports, there are important elements to be monitored, such as the intensity of purchases by China, exchange rate, and international competition.

The attached graph shows the evolution of the trade ratio between pork arroba and corn bags in Santa Catarina. On February 2, with the price of one arroba, it was possible to buy 1.32 bags of corn in the state, up from 0.79 at the worst moment of the crisis between Jan/Feb 2022, however, the account is unfavorable, as a more comfortable situation would be a number above 2 to 1.

The trade ratio will remain unfavorable in the short and medium term and will be extended during the second half, a period in which pork supply will be more balanced and domestic consumption more heated, that is, pig farming will experience better times in the second half of 2023. Of course, with lower corn prices in the second half of the year, the average weight of animals tends to rise. Brazilian exports to China must fall over the next few months, and the sector will need to diversify shipments so that there is no negative impact on the domestic market. China suffers from an oversupply of pork and depressed prices at the moment, which must affect its performance in the international market, both in terms of volume and price per ton.

Tags: imports, consumption, pig farmers, live pig, China, exports, pork, Brazil, prices, Production