May 15, 2012

 

Centuries-old hog cycle prices unsteady in 2012

 

 

China's centuries-old hog cycle, which may have gone missing in the US, is alive and kicking, where prices are set for a rollercoaster ride for the rest of the year.

 

The cycle represents a long-observed phenomenon, traced back to 17th century England, of rising pork output as producers react to increasing prices, leading to oversupply, which sends values tumbling and encourages herd liquidation.

 

This in turn fosters a supply shortfall, which increases prices, and so the cycle starts again.

However, while academics have proposed that the cycle has been absent in the US since 2000, potentially down to producers taking a longer-term view, in China the upswings and downswings are, if anything, becoming more evident, and set to play out over the rest of 2012.

 

Heading into 2012, "producers held a positive view on market potential, and therefore increased herd replenishment rates", Rabobank said, noting in particular a rise in piglet prices.

 

However, with a rise in pork output, "it is expected that hog and pork prices will generally trend downwards, with periodic fluctuations, in the remainder of 2012," the bank said, forecasting a drop 15-20% in prices over the summer.

 

"Decreasing hog prices will reduce the profitability of farming and slow down hog herd replenishment and recovery in the following winter. This will result in another rebound in hog prices in the next peak season of consumption heading into 2013".

 

Separately, Zhongpin, the Chinese meat group, forecast prices of both hog and pork falling 15-20% this year. The impact of the cycle has been particularly evident on piglet prices, which soared from a low of roughly CNY7 (US$1.11) a kilogramme in 2006 to CNY40 (US$6.33) a kilogramme in 2008, back down to CNY15 (US$2.37) a kilogramme in 2010, before recovering to some CNY37 (US$5.85) a kilogramme last year.

 

And it has a huge impact too for Western producers, given China's need for imports to make up shortfalls in its production of more than 50 million tonnes of pork a year - as much as the rest of the world combined.

 

Industry data released late on Thursday (May 10) showed US exports to China in March doubling to more than 61,000 tonnes in the first three months of the year, although Rabobank said it had detected signs of this trade "normalising". The bank termed prospects for exports, "especially China", as one of the main factors set to determine the profitability of US hog producers this year.

 

Chinese imports are of growing importance too for the EU pork industry, given increasing access to the market, with Denmark eligible for exports since 2007, and Germany since 2009.

 

"EU exporters are most optimistic regarding exports to China, as more member states are becoming eligible to export to this market, despite growing competition from other exporters and Chinese domestic production," USDA staff said in a recent report.

 

However, nothing a fall in EU exports to China early in 2012, Rabobank flagged "possible export pressure" as a threat to an otherwise improved picture for the European industry.

 

"With the seasonal peak, in combination with the approaching European Championship football in June, and the London Olympic Games in July, and piglet prices on average 19% higher in March compared with December, all signs are positive for [EU] hog prices to rise further in the April-June quarter."