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EU Pork Production Shows Resilience, but Industry Faces Major Challenges

Pork production in the European Union has declined in recent months but at a slower rate than expected, with lower sow inventories mostly offset by productivity gains. The partial sow stall ban that took effect in January has reduced production much less than some analysts anticipated, though the impact is essentially in line with European Commission, USDA and USMEF forecasts.

The relatively modest impact is likely due to a combination of weak enforcement by regulators and aggressive expansion by the EU’s more advanced, competitive operations. In countries where expansion is limited by environmental and other regulations (Denmark and the Netherlands, for example), the industry is shifting its focus toward raising piglets for export to countries – such as Germany – that have a more favorable environment for feeding and slaughtering.

As of December 2012, the EU’s total swine inventory was down 2 percent from the previous year to 147 million head, including:
  • Germany, 28 million, +3 percent
  • Spain, 25 million, -1.5 percent
  • France, 13.8 million, -1.4 percent
  • Denmark, 12.3 million, steady
  • Netherlands, 12 million, steady
  • Poland, 11 million, -15 percent

Total EU pork production slipped 2 percent in 2012, remaining above 22 million mt. Production dropped another 2 percent in the first half of 2013, and the decline for the full calendar year is expected to be between 2 and 3 percent.

Piglet prices are currently up 5 percent from last year, indicating relatively tight supplies and possibly also some optimism brought on by lower feed prices. Hog carcass prices have been moving higher since mid-May, with mid-July prices just 5 percent below the October 2012 peak at $1.09 per pound. This is 18 percent higher than a year ago in dollars, but with a stronger currency the increase is 8 percent in euro terms. For the larger producing countries, year-over-year changes in carcass prices are as follows (in euro terms):
  • Denmark, steady
  • Germany, +10 percent
  • Spain, +15 percent
  • France, +7 percent
Chart comparing the weekly EU Hog Carcass Prices from 2010 through 2013 in U.S. dollars
If second-half production declines at the anticipated rate, carcass prices could continue to outpace year-ago levels. But because pork demand within the EU remains relatively weak, strong exports will be needed in order to maintain this trend. Some prominent analysts predicted that the decline in EU pork production would cause the European industry to pull back from export markets, creating opportunities that could be capitalized on by the United States. But this has not been the case, as EU exports were strong in April and May.

The key question is whether exports will hold up now that European pork is reaching higher price levels. China is the EU’s primary market this year, accounting for 27 percent of total export volume. With exports to China composed of 56 percent offal and 42 percent muscle cuts and exports to Hong Kong more than 70 percent offal, strong variety meat exports have given an important boost to the EU pork industry at a time of rising production costs. Russian demand for European pork is also very strong, mainly because many of the EU’s competitors (including the United States, Brazil and Canada) are either facing a closed Russian market or have a limited number of plants approved for export to Russia. Chart comparing the EU Pork & Variety Meat Exports from January 2011 through December 2013 in Metric Tons

Compared to U.S. hog prices, the EU average reached a 70 percent premium during October 2012. This gap narrowed to 27 percent, however, by the end of the year. The spread between U.S. and EU prices remained between 20 percent and 40 percent through April, but disappeared this summer. If EU prices continue to surge while U.S. prices moderate seasonally, the EU premium will emerge again and the United States could be in a stronger competitive position in the global market vis-à-vis EU pork. (Though if current market access issues linger, this could nullify the U.S. price advantage in some markets.)

High prices, labor costs create tough business climate for packers
High hog prices are taking a toll on packer margins across the EU. Fixed costs vary widely from one EU country to the next, as does the ability of packers to adjust their labor force according to market conditions. In Germany much of the workforce is subcontracted, which reduces labor costs and increases the packers’ flexibility in adjusting work hours. France has high labor costs and virtually no flexibility, resulting in long periods of negative packer margins. GAD, France’s third-largest slaughterer, was placed in receivership in February, and the administrator has received no offers to take over the company. GAD has capacity to slaughter 3 million hogs per year but is now set to cease all operations by the end of August. Vion’s exit from the U.K. pork market is also an indicator of the difficult environment for EU packers.

Chart comparing the EU/US Hog Price Ratio from January 2008 through December 2013 Adverse weather in Europe, which got the spring barbecuing season off to a late start, also has contributed to weak EU pork demand. With relatively firm retail prices, consumption is flat-to-declining. This trend is unlikely to be reversed given the gradually deteriorating economic situation in the EU and rising unemployment in many European countries (with Germany being the most notable exception).

Both the European Commission and the Rome-based Food and Agriculture Organization (FAO) are forecasting relatively stagnant EU pork production, consumption and exports over the 10-year outlook period, making for a rather gloomy long-term forecast. EU pork producers appear to be weathering their increasingly difficult regulatory environment better than many analysts expected (remember last summer’s media frenzy over the so-called bacon shortage?). And despite a stronger euro, they are capitalizing on a favorable environment for exports. But maintaining production at the farm level is only one part of a difficult equation, which is well-illustrated by rising costs and other economic challenges facing the EU’s processing sector.