Pig Net Margins – a roller-coaster year for the pig industry

According to the latest AHDB estimates, the average cost of pig production in GB during Q4 was 164p/kg. This was 6p higher than the estimate for the previous quarter, driven in the main by an increase in feed costs.

Pig prices have been falling since the summer and continued to do so in the last quarter, pushing producers to negative margins, on average. The APP averaged 158p/kg during the three-month period, meaning producers made a loss of around £6/head (6p/kg) during the quarter.

Note that these estimated margins are derived from full economic costs, which includes some non-cash costs such as depreciation and family labour. While these are important for assessing the sustainability of the industry, these factors don’t affect the cash flow of businesses. As such, producers can survive for some time with negative margins, provided prices remain above cash costs.

The situation remains extremely challenging. Since December, pig prices have continued to fall while feed prices have increased further. The APP is now close to 143p/kg, and so for many producers margins will have worsened further in recent weeks. Weak pig prices on the continent, due to ASF in the German wild boar herd, has kept product that would otherwise have been exported, in the EU market.

Looking back, the worst loss in the last 10 years was in 2011 when the Q1 estimated loss was -29.9p/kg. Given the carcase weights at the time, this equated to -£24 per pig. Increasing pig prices together with lower feed costs through the rest of the year led to improved, but still negative, net margins. How margins play out this year remains to be seen; could we see a return to significant negative margins in 2021?

Despite the current difficulties, 2020 actually saw some records within the pig industry. The monthly-average APP hit 168.28p/kg in July, with SPP at 165.27p/kg. To exceed this, you have to go back to the highs of late 2013 when the monthly DAPP was just over 171p/kg.

The volatility of the pig price in 2020 led to a difference between the highest and lowest monthly pig price of 14.26p/kg for the APP and 16.01p/kg for the SPP. However, this is actually less volatility than most recent years. In particular, in 2016, the difference between the highest and lowest monthly pig price was 38.56p/kg (APP) and 39.37p/kg (SPP).

In recent months, we have seen record breaking carcase weights. The EU-spec APP sample weight has been consistently above 90kg this year so far. While not necessarily a producer choice, due to the current difficulties with capacity, taking pigs to higher weights can incur additional costs. The main cost will be feed, but keeping more pigs for more days also impacts on housing, heating, lighting, water, labour and bedding. Feed use is also affected by daily liveweight gains and feed conversion ratios, which are less efficient the older the pig.

When pig prices cover any additional cost of production it will still result in positive margins. However, when pig prices do not reward additional kgs, extra weight may accentuate problems. Some anecdotal reports suggest producers may be interested in continuing to finish at higher weights going forward, even when challenges with a backlog of pigs have abated. However, even under more “normal” circumstances, each producer will need to consider whether the cost of each additional kg is cost effective.  With good records, this could be a unit-by-unit consideration depending on the genetic potential of the pigs, on-going unit performance, unit resources, feed quality and availability.

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