Swine Industry Update: It is worse in the EU

Mark Greenwood
March 2008
 

It is not getting any better – The losses are continuing in the swine industry. This past month feed prices kept going up while hog prices improved some but not near enough. Losses in the open market are still close to $40 a head and everyone keeps wondering when will it get better and what do prices have to get to before we start getting profitable? Well, the first thing we need to do is to somehow get supply reduced. The last cold storage report shows that we have an abundant supply of product. Even though exports have been very good we need to reduce supply to get any significant improvement in prices.

It is worse in the EU – I am currently in Spain and the pork industry here has over 2 million sows. They have had losses for over 12 months and these losses are consistent throughout the EU. The Spanish industry is losing around $20 per head in Euros, which equates to almost $35 to $40 per head in US dollars. They are being crippled by higher feed prices also. Current costs of production for the producers in Spain are over $200 a head at a sale weight of 230#. Below you will see a chart comparing the US with the rest of the industry.As you can see, the US is very competitive with the rest of the world in terms of cost of production. The US still has a competitive advantage with the rest of the swine producing countries. This will help the US in exports for the foreseeable future. Almost all swine producers globally are losing money and the price that they are receiving for their hogs does not match up with costs of production. Feed costs per head have almost doubled in the last 18 months and there is a lag effect from the cost side to what producers are being paid to what is being charged at the retail level. Pure economics (I am not an economist nor claim to be) will suggest that supplies of pork will have to come down to get prices to come up to a profitable level. Just because breakeven prices are higher we will need to reduce supply to get prices to go up. The next question is, how much does supply have to go down to get the industry profitable?

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What will happen to demand when prices go up?
– I went to a large local Supermarket in Spain and found a boneless pork loin in the meat case. The cost of this was $15.29 Euros per kilo, which equates to over $6.95 per pound in Euros. With the current exchange rate that would be over $10 per # in the US. I did not see people flocking in to buy this and wondered when prices do indeed go up, what will happen to consumption? I discussed this with people in Europe and found that most people buy meat but in very small amounts because the prices are so high. Time will tell on what happens to overall demand domestically and with our exports when prices do go up.