Farm Ireland

Friday 20 April 2018

Coming months vital as rise to 166c/kg key for profitable production

Michael A Martin

The past nine months have been a period of severe financial pressure on pig producers. Losses are not sustainable. Producers are anxiously seeking some indication as to when they will achieve a price greater than 50c/kg margin over feed costs.

The average feed cost per kilogramme deadweight for pig producers using purchased compound feed last month was 116c. Based on the need for a margin over feed costs of 50c to provide a reasonable return, pig prices need to increase to 166c/kg. Profitability returns when prices exceed this figure.

The average price in the early part of last month was 149c/kg for pigs delivered to the slaughter plant. This means the producer price was still 17c/kg deadweight -- or about €13.60/pig sold -- below target. This was the eighth consecutive month that pig prices have been below the average cost of production.

Pig prices have increased over recent months from a low of 139c/kg in December, but these rises have not been sufficient to compensate for the 29c/kg increase in feed costs since June last year (see table 3, below).

Pig prices increased in late April and early May by about 8c/kg. However, in the middle of this month there was an 8c/kg decrease in German pig prices in a single week, indicating a significant interruption in the necessary adjustment in pig prices in relation to feed costs. The release of some of the pigmeat from storage under the Aids to Private Storage Scheme is likely to have contributed, if only in part, to this substantial decrease.

Pigmeat prices reflect the balance between supply and demand. Pig supplies will not be affected by the sharp increase in pig feed ingredient prices of autumn last year for nine to 10 months. This time lag is based on the length of time from when a sow is mated until the progeny of that mating reach slaughter weight.

Based on a reduction in the number of sows mated and a corresponding increase in sow culling, there is likely to be some reduction in pig supplies from June/July this year and not just in the European Community. This would be expected to lead to better pig prices, even if this results in some reduction in consumer demand.

European pigmeat futures markets have consistently shown that pig prices are expected to increase through this year, peaking in August. A similar forecast applies in the USA. This relationship between a rise in feed ingredient prices and pig prices may be observed by what happened in 2007/8. A steep increase in feed ingredient prices in the autumn of 2007 resulted in an rise in the feed cost to 115c/kg.

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This resulted in pig producers incurring substantial losses before pig prices exceeded a target price of 165c/kg deadweight in August 2008.

Pig producers will require an extended period when the margin over feed costs exceeds 50c/kg deadweight to recover the losses incurred since last autumn.

While there are expectations that feed ingredient prices may fall after this year's grain harvest, this can hardly be taken as guaranteed, given the impact and uncertainty of worldwide weather and demand factors. It is, indeed, arguable that feed ingredient prices are likely to remain high for some time. For pig production to remain viable, pig prices will have to take account of the increase in the price of feed ingredients on an ongoing basis.

The coming months are critical to the future of the pig sector. An early return to profitability is essential for producers to start to recover the losses incurred over the past nine months. The sector will also require significant capital investment in sow housing and pig facilities in order to comply with pig welfare legislation from January 2013. This is additional to the repair and maintenance work that will have been deferred due to the current, severe financial pressures.

Indo Farming