Making the impossible possible

Spain began 2023 with the highest price in history for the month of January. Lately, we have jumped from one exception to the next and from one record to the next. This new year begins as last year ended, with the market stretched to the limit.

Since the start-up of the new mega-slaughterhouse in Binéfar, Spain, the country has had a slaughter capacity that far exceeds the available supply of animals to slaughter. Inevitably, this circumstance, which will last for some time, causes tension in the negotiations between pig farmers and slaughterhouses.

The significant incidence of PRRS in recent months acts as a contributing factor to the pressure by further reducing the availability of animals. It's raining on wet ground and we are short on a lot of pigs (considering what we would like to slaughter); a lot of pigs. Our idea that in February pig prices would come down has vanished like snow in the summer sun.

Let's get a global perspective. Let's look at the current pig prices in the western world in the following graph (we show the "raw" prices without considering or evaluating the hypothetical overprice premiums that could exist in our market, being as it is so stressed):

From this chart, we can conclude that Spain doesn't have just a pig price but a sort of "Monument to Pig Prices," perched up there in its peculiar Ivory Tower. The highest price among the countries with significant exports. Anyway, given the price chart we have to say... poor Canadian farmers!

We know that Spain has been exporting more than 55% of the pork it produces for several years now. All this exported pork has to compete with pork from the USA (the world's leading exporter) and from Canada and Brazil, mainly in Asia.

We know that the Spanish demand for pigs cannot be met (hence the latest price increases) and that, with this premise, the market is rising without hesitation. Slaughterhouses are suffering savage losses and for months the processing industry has not been able to reflect the pork price increases from last spring in its processed products.

Spain exports more than half of what it produces and also has the highest pig price among Western countries? This is what is happening here and now. It seems impossible but it is not, because it is happening. It is happening and it is real and palpable.

Pork prices -in the international markets- have done nothing but go down since the beginning of the year; the slaughterhouse is noticing as time goes by that its margin goes from losing a few cents to losing -as it has been said- wildly large amounts every week. At this time, a voluntary reduction in activity is already being imposed ("Kill to lose? No thanks) which should leave live animals on the farms instead of in the transport trucks for slaughter. When that happens (things are slow, it remains to be seen if it will be the case in February) the current price increase will stop and we can think about prices going down. Let us note here that the average weight of slaughtered carcasses is at the highest in history, bordering 93 kilos; in principle, more carcass weight should mean more supply, but... everything has been different and very exceptional lately.

The slaughtering and cutting industry is facing a complicated year as never before. So are the processors, who are already coming from a year with negative results. No factor can be seen on the horizon that can correct or fix the current mess (we have to refer to these savage losses in some way) and there will be no other way but to suffer and try to hold on. We will see what we have never seen before in terms of negative earnings in this link of the chain.

We are coming from a completely atypical year; throughout the year we will be able to assess to what extent the very important reduction in slaughter in Germany affects us. As we have explained in previous commentaries, the reduction in slaughter in Central Europe (Germany, Poland, Belgium, the Netherlands...) is an undeniable fact and its effects on the Spanish industry are unknown due to the novelty of the situation. It seems obvious that the reduction of local supply in Central Europe will create opportunities for Spanish operators.

Whatever happens, we will have to live with skyrocketing energy prices and never-before-seen feed prices. The pig price in Spain will move much higher than usual throughout the year. In any case, at this stage of the year, with the live pig market hyper-stressed and the gradual reduction of feed costs, it seems that the profitability of Spanish pig production is assured for the whole of 2023 (barring unforeseeable catastrophes).

The slaughterhouse is in the middle of the crossfire (like the one the processor encountered last year): the shortage of supply on the one hand (which will not be corrected in the course of the year) and the abundance of pork in the internal confines of the EU on the other (which will persist as long as China or Asia in general pave the way). The industry's credit and economic lung will mark this 2023.

The great German philosopher Immanuel Kant said: "The intelligence of an individual is measured by the amount of uncertainty he can bear." That's where we are. Exactly there.

Guillem Burset