The sector’s expectations for higher prices and recovery of margins were frustrated in November. The price of a live kilogram negotiated in the Center-South of the country was BRL 6.34 on November 24, down 1.84% from the closing of October, when it was at BRL 6.45. The current market scenario leads to the understanding that industries and retailers are already prepared in terms of stocks for the year-end demand, a period that marks the peak of domestic consumption. The attached graph shows the average live price asked by independent farmers and the cost curve in Santa Catarina, the main national producer and exporter. Fragility is evident, and the prospects are not promising for the next few months, as will be described below.
It is worth noting that domestic demand is advancing, and Brazilian exports have shown excellent performance in the second half of the year, and even in this scenario prices have not been able to advance sharply. That is, domestic availability remains high. Production is the key element, being the determining factor for the complicated scenario of Brazilian pig farming. The big question is whether production will keep rising in 2023 and the sector on alert, possibly with deteriorated margins, especially in the first half. According to SAFRAS & Mercado, production must reach 5.218 mln tons in 2023, up 3% from 5.065 mln tons this year.
Besides production, the sector must pay attention to several factors, including:
- The dynamics and price of the main feed inputs, corn and soymeal;
- The currency movement;
- Level of inflation and consumption power of the population;
- Price evolution of competing proteins, beef and chicken;
- The evolution of exports and international prices.
Prices along the pig production chain may suffer due to the increase in production and, with that, pig farmers will have little room for error, having to seek maximum efficiency out of the farms. Noting that independent farmers have suffered from losses since 2021, with several falling by the wayside since then. The cost of production tends to remain at high levels, affecting the profitability of the activity, mainly due to corn, which is likely to present a difficult supply scenario in the first half of next year. The new soybean crop is estimated at around 154 mln tons, which must result in pressure on soymeal prices. The market is likely to centralize logistics on the sale of soybeans and put pressure on corn, which will still have a modest summer crop. The scenario must be bullish for corn and bearish for soybeans in the first half of 2023 if the current factors remain constant, such as climate change.
The exchange rate can affect both the dynamics of pork exports and the cost of production. The financial market is starting to see the next government with pessimism due to the processing of the transition PEC [Proposal of Constitutional Amendment] and the possible nominations for the new economic team. The theory says that monetary expansion without growth in the production of goods and services tends to result in inflation and a reduction in future economic activity. Of course, at first, the increase in circulating currency favors consumption and the population’s sense of well-being. Owing to the uncertainties related to the economy, currency volatility and interest rates in the country are high and must affect the agents’ investment decisions. The appreciated dollar acts as a positive factor for exports, making Brazilian products more attractive in the international market, but imports are expensive and affect the cost of production, considering that many inputs used in Brazil are set in dollars.
Besides the level of inflation, another factor that can affect pork consumption is its attractiveness compared to substitute products, such as chicken and beef. Pork is the third on the Brazilian preference scale, so for its consumption to expand sharply, prices need to be attractive at the end. The housing of breeding chicks has advanced in the last two months, resulting in a strong increase in the supply of chicken and a decline in wholesale cuts, which is one of the factors that hinder further advances in the demand for pork cuts. For 2023, beef prices tend to stand still due to the activity cycle, signaling an increase in production.
Owing to the advance of Brazilian pork production forecast for 2023, exports will be fundamental for adjusting domestic availability. However, the external scenario will also be challenging, considering that China and the Philippines may slow down the pace of purchases. The Philippines is starting the recovery process after suffering from African swine fever, so it will need lower volumes to meet local domestic demand.
As for China, the country has invested in production since the second quarter of this year, when activity margins were positive. China increased imports in the second half of the year, aiming to meet extended holidays such as the Golden Week, in October, and the Lunar New Year, in late January. The live hog futures curve listed in Dalian is already declining. The Jan/23 contract closed last Thursday (24) at 20,305 yuan per ton, and the Sep/23 at 17,520 per ton. It is worth noting that at the end of the third week of November, live pigs averaged 25.48 yuan per kilogram (or 25,480 yuan per ton) in the interior of the country, according to China’s Ministry of Agriculture and Rural Affairs.
The negative sentiment for prices is also due to the impacts of COVID and the slowdown in the Chinese economy, factors that impact demand. If production is advancing and demand is falling, the country will need lower volumes of imports and at lower prices. Falling export prices mean tighter margins for meat packers, which is negative for the live meat business environment in Brazil.
The factors indicated above point to a challenging scenario for the Brazilian pork market. Local supply will remain high, exports tend to cope with difficulty in rising, and the cost must impact profitability. On the other hand, the advancement of social programs may stimulate demand in 2023, with a possible slowdown in 2024.