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Last Thursday, after the weekly price was set, the first case of ASF in German territory was confirmed. A female wild boar was found dead in Brandenburg, in the former GDR.
The official German market (VEZG) which had seen no change in price on Wednesday the 9th at 1.47 euros/kg carcass, suddenly dropped on Friday the 11th by 20 cents/kg carcass. With retroactive effects (another display of exceptionality due to force majeure). This drop represents a decrease of over 13%, something inconceivable under normal conditions.
In less than 48 hours, most of the third countries that receive German pork (China, Korea, Singapore, Japan...) banned its import. This is a very hard blow for the German pork sector.
To gauge the magnitude of the problem, we explain that Germany slaughters about 1,000,000 pigs every week. Of this amount, 30% is for export (i.e. the pork equivalent from 300,000 pigs). Sixty percent of German pork exports go to EU territories and the rest, 40%, to third countries. This means that the equivalent of about 110,000 pigs won't be able to be exported (although some minor market will continue to import). At least an extra 9,000 tonnes must be sold within the EU on a weekly basis.
Increased exports from other Member States cannot make up for Germany's absence for the simple reason that it is impossible to freeze more than what is already being done. The problem seems serious -or very serious- depending on how you look at it.
We see two potential short-term scenarios, namely:
- Political negotiations (probably already underway) are established at the highest level between Germany and the People's Republic of China with the aim of getting China to accept the regionalization of Germany. Since Germany is organized as a federal state, this outcome cannot be ruled out. If this were to happen, normality would soon be restored.
- The situation remains as it was this week; it continues to be impossible for Germany to export to most third countries. In this case, the pumping of 9,000 tonnes of pork into one already fully supplied market (the European market), week after week, could not have any other consequence besides the collapse of prices.
The bottleneck that limits exports outside the EU is the freezing capacity. In all of Europe 101% of the freezing capacity is already used, ergo it is impossible to freeze more. The void left by Germany cannot be filled by other Member States (which would help to decongest).
From a purely economic standpoint, slaughtering and processing pigs to sell in Europe (at European prices) is not business: a little or a lot is lost depending on the efficiency and effectiveness of each slaughterhouse. On the other hand, slaughtering and processing pigs for sale in China is profitable. As the weeks go by we will see if two markets end up being established in parallel. We are in uncharted territory and no hypothesis can be ruled out.
The reference market in Spain fell by 0.004 on Thursday's market. We interpret this trivial movement as a sign that a waiting period has begun. If Germany manages to make the hypothesis about the regionalization happen, everything will be okay. If not… the price drops will be inevitable. Let us mention here for the record that next week Spanish pigs will earn more than 30 cents / kg live more than in Germany. That means about 30 euros per pig. A real spectacle.
If the situation is not resolved, tonnes and tonnes of German pork will arrive in Spain at unbeatable prices. The tension will increase, it will become increasingly more difficulty to sell in Europe, and prices (pigs and pork) will fall. An almost Dantesque situation is foreseen. Let us hope that the good offices of the German authorities will serve their purpose and convince the Chinese.
The swords are held at the ready, awaiting developments. We hope the situation can be reversed.
We will end with an apocryphal aphorism: "What good is it to be the best runner in the world if you don't know where your finish line is?"
Guillem Burset
