We spoke with leading analyst Brett Stuart, CEO of Global AgriTrends, who shared his outlook and analysis of the broad macroeconomic conditions impacting the white meat sector, as well as the market fluctuations that influence the poultry and pork industries: the price of corn, global inflation, and the rise of African swine fever and avian influenza, to name a few. As usual, Stuart shared valuable information that provides a clear and relevant outlook on how the industry is evolving in years of change.
What are the macroeconomic conditions influencing the markets today?
COVID-19’s heavy impact in 2020 was unprecedented as the pandemic spread globally. The announcement of successful vaccine candidates in late 2020 seemed to suggest a much more subdued 2021. That was not the case.
The prolonged effect of the 2020 pandemic burden on local and national governments was heavy. Consumer spending was subdued in some nations like Japan and South Korea as vaccine rollouts were delayed. Other economies like the U.S. saw rapid vaccine rollouts and heavy stimulus, sending consumer demand for goods into overdrive. This move overwhelmed supply chains and logistics and was most pronounced in North America. That same government stimulus led to surging commodity prices.
2022 now begins with extreme global food inflation levels. Strong demand continues out of North America and other nations. Higher vaccination rates could lead to reduced lockdowns, but rapid spreading of the new Omicron variant of COVID-19 has unnerved markets. Preliminary data suggests weaker symptoms from Omicron. This could lead to strong economic growth in many nations for 2022 that were still under rolling lockdowns in 2021. China, Japan, and South Korea are included in the list of nations with much-improved 2021 vaccination rates. We expect to see better demand for foods and protein in these nations.
The current inflationary environment weighs heavy on global markets. Central banks around the world have rushed to raise interest rates to reduce inflationary pressure. U.S. Federal Reserve Chair Jerome Powell recently shifted courses and is now suggesting three interest rate hikes in 2022 as well as a reduction in U.S. treasury purchases. These moves will moderate the sharp economic growth of 2021. The risk of stagflation is rising.
Stagflation occurs when inflation rates are high and economic growth slows. Brazil is currently experiencing stagflation as they are in a recession with heavy inflation rates. Other countries will likely face the same pressures in 2022. Those most vulnerable will be countries with heavy exposure to commodity price inflation (less developed nations) and rising unemployment rates. The heavily financed U.S. economy will be slower to see such pressure but is on the same trajectory.
Global pork markets are driven by China
Pork markets around the world continue to adjust to the post-African Swine Fever (ASF) environment. China’s ASF experience has reshaped global pork markets. Upon finding ASF in northern China in August 2018, Chinese hog farms liquidated aggressively through 2020 with culling estimates as high as 65%. Soaring prices ensued on widespread pork shortages, pushing hog margins above USD 300 per head in 2020. Those extreme margins drove producers to retain all available females (often market gilts rather than breeding gilts) which then led to heavy production by the end of 2021. Also widening outbreaks of ASF were reported in the first quarter of 2021 leading to heavy culling. Combined with larger production, the aggressive culling persisted through 2021. And the increased supplies saw prices fall nearly -70% from January to year-end. Liquidation began due to ASF in 2021, but prices fell below breakeven in June and further liquidation occurred as financial losses accrued. Those losses continue today.
With Chinese corn prices persisting above 2,600 rmb/mt (USD 10.30/bushel), margins will remain under pressure. Some sources suggest that the “true” Chinese hog breakevens are 18-20 rmb/kg. Current prices are 15.6 rmb/kg.
The result of China’s heavy 2021 culling will be tightening supplies in 2022. That will be manifest as live hog prices rise, likely in the first five months of 2022. We expect Chinese live hog prices above 25 rmb/kg by mid-2022. Imports will likely lag those price jumps by 3-4 months. Thus, we expect to see larger Chinese demand for global pork in the second half of 2022.
China’s influence on global pork markets has increased substantially since their 2018 ASF discovery. Global suppliers geared up through 2020 as Chinese import demand surged higher. But in 2020 as import demand fell, global pork producers saw prices fall sharply around the world. Most global pork producers are operating with financial losses as 2022 begins.
European hog farmers felt the sharpest pain from China’s slowdown. That was due to their strong market share into China. But Brazil, Canada, and the U.S. were not immune to those slowdowns either. We expect that 2022 begins with a smaller global swineherd and potential for margins to improve in the second half of 2022 based on global herd reductions and potential for improvement in Chinese demand.
Global poultry markets face feed inflation and HPAI
Poultry producers around the world felt the rapid rise in feed prices during 2021. Vegetable oil prices surged more than 100% following heavy global stimulus in 2020, driving global soybean prices higher. Grain prices (corn, wheat) were quick to follow with prices now more than 48% higher than they were in mid-2020.
Global poultry prices have risen more than 35% since mid-2020 according to the UN/FAO data. This has been in response to broad global demand. Also rising input costs around the world are pressuring producer expansion plans.
But there are variations in profits and pricing globally. In North America, the premium prices paid for breast meat have been enough offset the rising feed grain prices. However, outside of North America most poultry is priced on a whole bird basis, with more margin pressure where those breast meat premiums do not exist.
Also, the rise in HPAI has been quite severe in the Northern hemisphere this past winter. Cases and outbreaks have soared far and wide across Europe, Russia, and Asia. The rapid poultry life cycle means that culling and recovery are much faster than in swine or other livestock. This softens the impact of HPAI. But as outbreaks continue, supply risks rise. And global partners are quick to halt shipments from quarantine zones.
The key HPAI factors to watch include further widening outbreaks in Europe, Russia, and Asia. As well as outbreaks in North America. China has seen an increase of human variations of HPAI, but thus far they remain a very small number.
For 2022, expect continued strong feed grain prices to pressure global poultry producers. We do see stronger demand continuing in North America due to the strong cash position of consumers. Also, higher priced beef and pork appear to be increasing demand for poultry into Japan. This could occur in other markets as well if we see poultry prices move higher into the second half of 2022. Poultry remains the most affordable protein in a price-inflated global market.