Is Arbitrage Underway?
We have been pointing out for the last few weeks the record price difference between Europe’s and the United States prices of market hogs. Last week Spain (largest producer in Europe) market hog price set a new record at 1.89 Euros/kg live – 92¢ U.S./lb. live. Current U.S. price is 59¢ lb. liveweight. The Spain – U.S. price spread on a 280 lb. market hog is $92 U.S. The biggest difference ever.
If arbitrage is happening it is logical to expect an increase of pork exports from USA as foreign buyers look to purchase pork at a lower cost than Europe. The latest U.S. exports weekly sales data indicates 51,920 metric tonnes sold, the week before 45,000 metric tonnes. Export weekly sales have been running in the 30,000-tonne area. Obviously the last two weeks sales are showing a big jump. So far exports shipped have not increased from the 30,000-tonne range. As there is time lag from orders to shipping. The big jump in sales might be indicating orders pulled forward making the sales increase misleading but if sales continue to average well over 30,000 tonnes a week it will be true indicator of bigger exports and we will see stronger hog prices as the pork leaves North America supporting domestic prices.
- We expect if U.S. pork exports are increasing so should Canada’s. We know more Canadian pork is starting to go to China from the plants in Canada just approved for export. Any increase of pork exported to Asia from Canada is support for both the U.S. and Canada market, as less Canada pork is available to ship to U.S. market.
- There was some more Europe Swine Inventory Data released the last few days. It indicates the Breeding Her has declined significantly from our calculations of December data.
| Breeding Herd December (1,000 head) | ||
| 2020 | 2021 | 2022 |
| 11,417 | 11,035 | 10,407 |
It appears the European Breeding Herd is down about 600,000 in the last year and about 1 million in the last two years. It’s not complicated people lose money, and you end up with fewer sows and pigs. Massively cut pig production and prices got to record levels. We expect even lower European market hog numbers in coming months as liquidation cuts supply and mortalities stay high from the removal of copper sulfate and limited antibiotic use leads to further attrition. We expect more upside to Europe than downside to Europe’s hog prices due to supply being cut. Their continued high European prices should push U.S. – Canada prices higher as exports increase cutting domestic supply. Arbitrage.
Other Observations
- USDA is forecasting 2023-24 corn price at $5.60 bushel down $1.10 from last year. U.S. corn declined 30¢ bushel last week. U.S. corn exports continue to run well below projections. Lower corn price would be welcome news to the swine industry.
- U.S. cattle on feed inventory report for February 1 continued to indicate the reality of fewer cattle with 4% less than February 1 last year. The lowest cattle inventory in 50 plus years will lead to record prices and support hog prices throughout the year. Beef cut-outs over $2.88 lb. Hogs are 86¢ lb. Certainly can purchase a lot more pork with $10 then beef.
- Last week there was announcement of cooperation agreement between Prestage Foods who have a slaughter plant in Iowa and Wholestone Foods who have a slaughter plant in Nebraska. The pork slaughter industry has had a big challenge to make money recently. You only have to look at multiple financial reports of several packing companies to see the hard reality. The cooperation between Prestage and Wholestone is a logical development in a challenging environment to improve marketing and lower costs.
Wholestone had announced previously they were going to build a new slaughter plant in Sioux Falls, South Dakota and double shift their Nebraska plant. Prestage is a newer plant. We understand it has the capacity to process more hogs per day than they are currently.
Finally
Last week the USDA came out with a projection that total red meat and poultry production will be lower in 2023 than 2022. This is the first time since 2014 of a decline from the year before. We all remember that 2014 was one of the most profitable in history for the swine sector (PED year cutting production). We continue to believe lean hog futures are undervaluing the potential prices in a near future. Less meat protein in both USA and Europe will lift prices as domestic and export buyers bid to purchase from lower supply.
Categorised in: Featured News, Pork Commentary
This post was written by Genesus