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The inevitable has happened. It took a while, but the descent, with its airs of collapse, has arrived. Like a boat brushing the sandy bottom and the waters getting shallower with each passing moment, the price of pork has been inexorably losing momentum. In Germany this past Wednesday, the 22nd, the price of Pork price fell €0.09/kg carcass weight, in a kind of unconditional surrender to the accumulation of difficulties coming together in unison. The worst thing is that we are only at the beginning of a slope that takes us into unknown territory.
In our previous commentary we literally said: "In short, the market will more than correct any deviation, and will do so abruptly. All in due time." In another paragraph we said, "In other words, the worst is yet to come." That's where we're at. Unfortunately for production, these predictions are and will be true.
So many adverse factors have coincided at the same time:
- Bars, restaurants, hotels, campgrounds, etc., this whole important market segment has disappeared. There is not enough compensation in other areas. There is no prospect of them reopening soon.
- China continues to buy, but insists week after week on lowering its prices, supported by American offers at much lower prices than European ones. And China manages to renew its orders in Europe at cheaper prices for each new contract.
- Slaughterhouses are unable to handle all the pork produced. This reality is very alarming and is triggering a downward spiral with an uncertain outcome. The reason for all this: the supply of pork is far greater than the demand.
- The State of Emergency issued by the Spanish authorities is a disturbing factor; inevitably the efficiency of the slaughterhouses is compromised and their capacity is certainly limited by the observance of the rules imposed.
- Both the US and Canada offer their pork to Asian markets at unbeatable prices; their pigs are much cheaper than European ones (and their production is rising).
The current bearish situation began in Spain on Thursday, March 19 after the State of Emergency was declared. Since then, the price has fallen by 10.00% (from 1.54 to 1.388) and in Germany it has fallen by 13.50%. But the United States has seen its price drop by 44% and Canada by 35% (from the maximum price of the year to the present).
The price in Spain is falling. But it's falling more slowly than that of our competitors. The proverb "he gives twice who gives quickly" doesn't apply here, but the consequence will be that, later, we will have to run faster. A 10% cumulative drop seems mild to us, even very mild for what is to come. There's no doubt that we'll have to hold on tight because there are curves ahead.
The same amount of pork that would normally be absorbed by the market without any problems is instead transformed into an avalanche that cannot be absorbed in the short term because of the contraction of purchases. Thinking that the situation will become more complicated is unavoidable. It is important to remember that the current price in itself, stripped of all other considerations, is well above the cost. Yes, it will be necessary to make concessions, but the starting situation isn't serious. It is important to put things in perspective. Crisis? Yes, but "a heavy purse makes a light heart".
At the beginning of this week we saw the unthinkable: oil in the US held a negative price for 24 hours (i.e. producers, in addition to their production costs, had to pay the wholesaler to take the oil produced). The world is upside down. The unthinkable has happened, granted only every now and again, but it has happened. Another consequence of the pandemic. We should hold onto the idea that "the unthinkable has happened", which could be repeated in other fields.
It is impossible to predict where the ground will be firm for our pig price. China's deficit will continue to exist, the strict observance of confinement will be relaxed, the catering establishments will reopen, the hotels too, summer will arrive and we will recover much of the normality.
We believe that this "new normal" will be restored at a price above cost. There is still a long way to go before we reach the end of this outstanding situation; let's wait until we get there and once we have overcome the difficulty, we will be able to analyze in detail the hows and whys. And draw conclusions if possible.
Let us grasp the depth of the saying: "The wise always want to learn, the ignorant always want to teach." Simple, but hits it right on the nose, right?
Guillem Burset
