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Due to COVID-19 and post Brexit reasons, UK is facing an acute
shortage of labor, similarly experienced around the world,
impacting meat processing facilities and the ability to get animals
through the system. In recent months, UK meat processors have been
forced to reduce processing throughput as much as 25%, marking a
crisis that is further compounded by a shortage of truck drivers
resulting in supply chain disturbance across UK. The reduced
throughput has put producers on the defensive, holding animals
longer in the barns and now running out of barn space as piglets
are born and continue to flow through the farming system. Producers
are forced to make difficult decisions with what to do with the
animals, already beginning the decision to cull animals.
The prices of hogs have fallen away post-July rather sharply in
the last 30 days, down roughly 5%. This is making an already
difficult situation that has worsened as the level is below
breakevens for many producers on this year's higher feed input
prices and now the cost to feed hogs in the barns longer is adding
to the breakeven point. Because of this, farmers cannot house
animals continuously, and processor throughput is not expected to
increase any time soon. Producers are thinning animals, with some
estimates calling for more than 120,000 swine to be culled. The
point of culling is an easier decision for market hogs that are
relatively young, with limited costs associated in young life
cycle. This opens up barn space and feed availability to hogs
already well invested into market readiness and protects some of
the producer's profits. If UK producers decide to cull more than
120,000 head, the result could be a drop in annual production by
2.4%; however, this is likely skewed to a smaller window of animal
availability. If the reduction in animals occurs at a quarterly
level of market hogs (typical due to age and investment in animal),
then as the fourth quarter turns into first-quarter 2022, hog
production could be harmed as much as 6-7% localized to the
quarter.
In the short-term, culling of animals is likely to do little to
support or reverse the loss in hog values, since producers are
likely to hold onto market ready hogs as long as possible with an
oversupply of current hogs. This will keep a backlog of hogs in the
system for the next three to four months and hog values lower than
breakevens. Culling market-ready animals certainly would reduce the
stress on hog barns and feed availability but guarantee a 100% loss
of all invested, with producers always aiming to recoup as much of
the investment as possible, sans government subsidy. At best, all
pig prices in UK could get back to 157 pence per kg before the end
of the year, but the current backlog of hogs likely will keep
prices down to 150 pence per kg into the start of first-quarter
2022. Significant culling now would be expected to produce strong
price accretion as first-quarter 2022 moves into second quarter,
with a potential hole in the herd and creating the reverse effect
of the present scenario.
The UK has been in expansion mode of the swine herd over the
last five years, now at levels not seen in the last 15 years. This
expansion is clearly contributing to the oversupply of hogs
currently and any culling of animals in the short term will negate
the growth from this year, possibly getting the herd back down to
2019 levels with the risk that 2022 prices approach 2020 levels
again.
Posted 15 October 2021 by Adam Speck, Senior Economist, Livestock, S&P Global Commodity Insights
