UK farm-gate pig prices eased last month. This is not unusual for the beginning of the year, when meat consumption tends to be subdued after the excesses of the festive season.
However, farm-gate prices have been trading around 16% lower than a year ago.
According to Iain Macdonald, economics analyst with Quality Meat Scotland, a number of factors are at play.
“The most significant of these have been on the supply side. Indeed, at the UK level, 2014 was the fifth consecutive year of increased pig slaughterings and the number of pigs slaughtered was at its highest level since 2002,” said Mr Macdonald.
“Once you factor in heavier carcase weights, at 862,100 tonnes, UK pig-meat production was at its highest level of the century.
“At the start of this year, weekly abattoir throughput is estimated to be running 7% ahead of last year.”
The increased level of supply is despite UK census data reporting a contraction of the breeding herd.
Last June sow numbers were down 3.5% year-on-year at 406,000 head. Compared with 2002, there were 28% fewer sows.
“These figures show how significant the improvement in pig sector productivity has been. Years of investment in improving herd health and genetics have seen a huge leap forwards.
“With the cost of feeding each sow spread over an increased output of pig meat, producers are therefore better placed to withstand a reduction in farm-gate prices,” said Mr Macdonald.
“However, feed costs have also played their part. In late January feed wheat was trading at less than £120/t at the farm gate, compared with £160/t a year earlier and £220/t two years ago.
“Two good years of growing conditions in the US Midwest have seen global grain production surge and prices fall back sharply.”
He said it has been a similar scenario for soya beans, pushing down the cost of buying in soya meal. However, a decrease in the value of sterling against the US dollar has limited the extent of the soya meal price decline to around 10% when quoted in sterling.
With feed representing around two-thirds of overall production costs, this will have eased the pressure on margins.
“Looking again at pig prices, it is not only domestic supplies and productivity which have been putting pressure on the market. With the EU locked out of Russia a key export market for over a year now, processors across the Continent have found it harder to find customers for fats and offals as well as for fresh meat” said Mr Macdonald.
Furthermore, pig-meat production across the EU has risen more than 4% year-on-year in the three months to October, adding to the imbalance between supply and demand.
“The consequence of this imbalance has been significantly lower producer prices.
“Indeed, the EU average was nearly a fifth lower than a year earlier in the week ended January 25, with even larger declines of 22% in Holland and 28% in Spain,” Mr Macdonald said.
The fall in prices on the Continent makes importing pig meat look favourable to UK food manufacturers and retailers.
At the same time it makes exporting difficult, forcing UK exporters to accept much thinner margins if they need to compete based on price.
The sterling exchange rate against the euro has added to these pressures, Mr Macdonald said. The pound traded 5-8% stronger year-on-year against the euro in the second half of 2014.
Since the European Central Bank announced a programme of buying bonds from banks and asset managers, the euro has fallen further. At around 75p, it is worth 10% less than a year ago.
“In recent weeks the differential between the UK and EU average farm-gate price for pigs has widened to stand at 40% in late January.
“This compares with 20-25% in the first quarter of 2014 and just 5% two years ago.
“So, despite an even stronger rise in production in the UK, prices have been falling much more slowly than on the Continent.
“One likely explanation for this is consumer loyalty in Britain and a preference for British pork over imported product.
“Indeed, if we look at household purchasing data from Kantar Worldpanel, while overall pork sales volumes in GB were little different in 2014 from 2013, the volume of home-produced pork sold increased by 6.5%.”
Over the Christmas period home-produced pork outperformed the overall market, showing a 3% increase in the four weeks to January 4, compared with an overall 1% decline.
This change in consumer demand suggests that the wider gap between UK and EU prices might just be sustainable.