Danish Crown: The market for pork is severely challenged
"There is no doubt that the crisis that has hit Europe as a result of the war in Ukraine has caused consumers to either buy less or cheaper. Here in the new year, we see it on virtually all products across our business, and it has put the market under pressure," says Jais Valeur, Group CEO of Danish Crown.
The lower consumption in Europe comes on the back of a 2022, where the export of pork to Asia in particular has been significantly lower than in previous years.
In the first nine months of 2022, exports out of the EU declined overall by approximately 25 percent. This corresponds to approx. 5 percent of total production in Europe. Exports out of the EU from Denmark alone fell in that period by approximately 138,000 tonnes. As far as Denmark is concerned, this is a drop of just over 16 percent, which corresponds to the meat from more than 1.5 million Danish pigs were instead to be sold in Europe.
"Our business is in balance when we can sell up to half of our goods frozen, while the rest is sold fresh on the European market. We are not there at the moment, and therefore we are behind countries with a strong domestic market, as is the case in Germany and Spain, where most slaughterhouses sell over 70 percent of their goods within the country's borders," says Jais Valeur.
In the last months of 2022, there was again some demand for pork from China. It helped keep pork prices down in Europe, but that export has now come to a standstill again.
This is because the consumption of pork in China has fallen sharply as a consequence of first prolonged shutdowns, and now after the re-opening, most people are sitting at home for fear of getting infected. The low consumption of pork is clearly seen in the Chinese quotation, which has fallen significantly in recent months. Specifically, it has fallen from a level of around DKK 28 ( 1 DKK = 0,13 EUR ) to approximately DKK 14. The listing in China will of course correct itself as activity in society increases again, but everything else will take a few months.
When economic activity in China slows down, it quickly spills over into the whole of Southeast Asia. At the same time, the area is also affected by the high energy prices, which have weakened purchasing power, and at the same time, the warehouses were generally well filled with European products, which since summer 2021 have had to find "another home" than China. Finally, demand from the attractive market in Japan is subdued at the moment because their stocks are also at the high end right now with over 200,000 tonnes in stock.
The US listing has also fallen noticeably, and pork prices in the US - after a strong period on the back of COVID-19 - are now below Europe. For Danish Crown, the USA is a particularly attractive market for baby back ribs, but right now the American stocks are up to approx. 50,000 tonnes, which is certainly on the high end. At the same time, the dollar has fallen by around 10 percent since 1 October, and this affects Danish Crown because a large part of exports to Asia are also settled in US dollars.
In Europe, unlike Japan and the USA, stocks are relatively small. This is despite the fact that the consumption of meat has fallen in many countries. However, there are large regional differences. In some places, consumption is largely unchanged, but especially in Northern Europe, there has been a slide, with a drop in consumption of up to 10 percent in several countries.
The combination of price increases for energy in particular and higher interest rates has led to a paradigm shift in the market. Many slaughterhouses are under pressure on working capital, and this makes everyone hesitate to put goods in cold storage and balance the market, even though everything points towards price increases in just 2-3 months. Therefore, there has been intensive competition for the orders since the New Year.
"Although there are high quotations in both Spain, France and Germany, we are met by aggressive prices in the market right now. The battle for orders is most evident in the trade in hams to Italy. It is clear that both the German and Spanish slaughterhouses have products that they cannot sell through their normal sales channels, and this has caused the price of fresh hams to fall by more than 10 percent since the New Year," says Jais Valeur.
The production of pigs has decreased in the EU, and the decrease is expected to be between four and five percent overall for 2022. The largest and historically large decreases are seen in Poland, Germany, Great Britain and Denmark. The fall in production is expected in round figures to be on par with the decline in exports out of the EU. Therefore, the big challenge is that, according to internal analyses, the consumption of pork in Europe has fallen by three to four percent.
Inflation has affected production costs throughout the value chain, but mostly for pig producers. Therefore, production is also expected to fall in 2023. A fall of between two and four percent in the EU will create a balance between supply and demand. Therefore, everyone in the market is debating where the supply and demand curves are going to intersect. It is expected that a change will take place during the spring, but it is very difficult to predict because the consumption of pork will ultimately be decisive.
"We cannot escape the fact that our listing, together with the Dutch one, is among the lowest in the EU, and we are not yet at a place where we dare say with certainty that we have reached the bottom of the market. Our competitiveness is therefore still challenged. This is primarily due to the fact that we do not have sufficient exports to the attractive high-price markets. It is unlikely to change in the coming months, and therefore in the short term we are focused on getting the listing lifted to a level where there is balance in the economy again by producing pigs, and we hope to achieve that goal over the spring," says Jais Valeur
The only bright spot right now is stable exports to the UK, and that doesn't look set to change because local production has dropped quite significantly.
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