PORK IS CURRENTLY 20-25% UNDERVALUED
Updated: Mar 16, 2022
I’d like to share a brief summary of why, in my view, pork prices are set for a big correction within the next few weeks.
Grain prices are fluctuating daily, but in general they have skyrocketed from record highs (this was even before the war in Ukraine) to current unforeseen territory and this makes production costs extremely high. Russia and Ukraine are both large grain exporters. The biggest concerns now are that Ukraine won’t be able to plant within their 2-month window from 1 April, and the input costs to maize farmers in the new season (fertilizer, seeds, and fuel). The anticipated fuel and electricity increase in South Africa from 1 April 2022 will also have a direct impact on piggery production costs.
Feed is a significant cost component. The higher the maize price in relation to the abattoir purchasing price, the lower the profitability ratio. Historically in South Africa we have needed a Maize:Pork ratio of 1:9 to be profitable. With the Monday 14 March 2022 closing price on yellow maize at R4.248 per kg this equates to a pork price of R38.23 per kg. According to the Weekly Price Report issued by SAPPO, the latest reported abattoir price for Week 9 of 2022 was R24.31.
Soyabean meal, which is the preferred protein source in pig diets, has increased to levels close to R10,000 for locally produced product (from 2021 levels of around R7,800). As a product which makes up about 20% of the raw material requirement, the impact on feed cost is significant. In addition to feed cost increases, pig farmers have recently been subjected to increases of the national minimum wage by 6.9% for farm workers and electricity supplied by Eskom will increase by 9.61% from 1 April – just in time for the coming autumn / winter period. On-farm production cost is surely set to increase to well above the R27.00 level.
Due to the looting in South Africa last year, there was an oversupply of pigs and meat in certain areas and undersupply of pork in stores in other areas due to supply chain and logistical challenges. Plans were made to accommodate farmers, pigs were slaughtered, and pork was put in storage with the hope of selling it at a profit in December 2021, which unfortunately did not materialize and the meat had to be discounted during the first quarter of 2022, which fortunately stimulated demand. In 2021 we also saw the closure of a major processing plant in Gauteng and the opening of new commercial farms and deboning plants in South Africa. This led to a further imbalance in supply and demand – the ultimate driver of market prices. The market is slowly starting to accommodate the additional supply and the balance will return.
Consumer spending in South Africa is down, especially after the economic hardships experienced by many during the past 2 years of the COVID-19 pandemic. This is evident in retail spending and product choices. As the lockdown levels are reduced and the National State of Disaster soon to be lifted, South African pork will be first on the shopping list as a very affordable, trusted, and tasty meat choice. According to the SAPPO Retail Price Report, a slight recovery in pork retail prices has already been noted.
Other indications of expected increases in prices are talks of higher farmer prices in the Western Cape. Abattoirs are starting to ask about planned loads and increased numbers, “pig farming is a who calls who business”. The reopening, renovation, and rebranding of the old Chamdor Abattoir to StoneCreek Meats by the RussellStone Group is an exciting development in the pig industry and we expect this to increase slaughter capacity and improve supply chain capacity to the market.
South African Pig farmers have consistently improved their production and the quality of the product delivered to the market. SAPPO’s quality assurance program, Pork 360, has played a big role in standardizing the way farmers control the production on and biosecurity of their farms. The government-controlled compartment system has ensured that ZA registered farms comply with strict biosecurity measures to prevent outbreaks of controlled diseases and further ensure safe and healthy pork. Several smaller and non commercial farmers have unfortunately left the industry due to continued financial losses, which will also reduce the supply of pork. Now is the time to start putting more focus on the consumption of Proudly South African Pork in our retail outlets.
In Europe, there is a disconnect between grain prices and pig prices (as in South Africa). In order for pig farmers to be able to sustain their livelihood, the price of pork will need to rise quickly. Pig prices are expected to increase rapidly, and it’s expected that governments will start to introduce stabilization measures to ensure food security. Prices may jump 20% to 25% across the continent by the end of March.
Price increases have been seen recently in the UK, some EU countries and Thailand, Taiwan and Vietnam. In addition to local production, South Africa imports pork from Brazil, the Netherlands, Spain and the UK for consumption. Until recently, worldwide there was an oversupply of pigs and prices were under pressure. Even Germany, Spain and the USA were on negative margins. Production declines due to herd liquidation have been observed in North America, Europe, and China at the same time. This will lead to stronger prices across the world. With higher international prices, local product competitiveness will improve.
Animal feed and food in general is not going to become cheaper globally, or in South Africa, and therefore the pork price needs to increase quickly in order to realign with its value. We are seeing a slight upward trend in the pork price, but we need a R6 correction on the current R24.50/kg level. With the approaching school holidays and Easter Weekend, this can surely be realized.
Managing Director - Taaibosch Group