The GB Average Pig Price (APP) currently stands at just over 150p/kg deadweight; 35p/kg higher than this time last year, when prices were at their lowest for 8 years.
This turnaround was first triggered by a fall in production, helping to deflate an oversupplied market, which coincided with import demand from China increasing considerably. Following on came the referendum that saw the UK vote to leave the EU, causing a fall in the value of the pound, making UK exports more competitive and imports more expensive.
This period of improved returns looks set for the short term with the pound/euro possibly reaching parity, but the industry should not be complacent as weaker sterling is already reintroducing inflationary pressure on key farm inputs such as feed and fuel. It is therefore important for producers to maintain close control over variable and fixed costs, which may be facilitated by locking into margins through forward buying.
Medium and longer term prospects for the industry remain uncertain. The state of the pig industry and agriculture as a whole will be significantly affected by Brexit negotiations.
The most important factor will, unquestionably, be the future trading relationship the UK has with the EU. Although not supported by direct payments, the pig industry is indirectly supported via significant import tariffs on products from outside the EU (€50-150 per 100kg), thus making these products uncompetitive in the single market.
It is becoming apparent that the UK Government is edging towards a ‘Hard Brexit’. Immigration was a key driver of the referendum outcome and delivering the desired restrictions on movement seems incompatible with the UK remaining in the single market. Restrictions on migrant labour are a huge concern to the pig industry, particularly the processing sector, with 50-70% of workers coming from outside the UK.
Being outside the single market could also, potentially, leave UK produce subject to the level of EU tariffs mentioned earlier. Pig producers will be looking for more favourable trading terms, given that 30% of the UK’s pig meat is exported, with 70% of that going into Europe. On a more positive note, growing demand for high welfare and antibiotic free products, places the UK in a strong position within export markets, European and beyond, due to the industry’s high reputation worldwide.
Whilst there may appear to be little producers can do to influence these external factors, the industry is no stranger to change, and has proved to be resilient and adaptable. We believe pig businesses should look to develop strategies which are “bulletproof” and can withstand volatility and uncertainty, as we move towards Brexit.
Those businesses that had to take on additional borrowings, over the last 24 months, should take advantage of the current market price uplift to reduce debt and strengthen balance sheets. All producers should ensure that production costs are minimised and that any reinvestment will genuinely increase efficiency and profitability.