Why inflation will only increase European pork market volatility

Pork is the planet’s second most consumed meat, right after chicken. Net global production in 2021 was estimated at more than 100 million metric tons carcass weight. Today, pork prices are closely watched by shoppers and government economists alike because of their importance to both household and national budgets.

Pork economics 101

Economists coined the term “pork cycle” back in the 1920s to describe agricultural market fluctuations driven by cyclical supply and demand patterns. In brief, the model explains that in times of high prices, investments in more production capacity go up. However, due to the production lag between investment and ready product (breeding time), the effect of these investments is delayed, and investments continue to increase with the expectation that they will pay off. Over time, however, what was a supply deficiency turns into a supply surplus, and prices go down again, leading to a new round of price decreases and production cuts. And around and around pork prices have gone, ever since.

A hundred years ago, the pork cycle demonstrated the inherent instability of pork prices in the two countries where it was first described – U.S.A. and Germany. Back then, international trade in pork was extremely limited and national prices fluctuated largely independently. Today, things are different.

The globalization of pork trading

The industrialization of pork farming over the last 50 years concentrated and professionalized production, leading to huge productivity increases. Cold storage and reefer container technology matured in the 1970s, enabling efficient international storage and transportation of pork like never before. These logistical advances laid the ground for the huge growth in international pork trading ushered in by globalization and its liberalization of trade and capital flows and rapid economic development in countries like China.

China’s current significance for the global pork market cannot be overestimated. For one thing, the nation’s cultural ties between humans and pigs run deep. For example, the Chinese word for pig is largely synonymous with the word for meat, and the Chinese character for home and family, jia, consists of the character for pig under the character for roof. Language aside, pork is the preferred animal protein and represents a whopping 70% of all meat consumption in China. Indeed, increasingly affluent Chinese have made pork part of the party ever since the end of the Cultural Revolution: pork consumption increased from just seven million tons in 1976 to 86 million tons in 2018, and China now consumes about half of total global pork output.

The international pork market’s price volatility has many contributors – and recently added more

Beyond the fundamentals of supply and demand described a century ago, a range of other factors impact today’s global pork market.

Currency exchange rates made little difference when countries produced their own pigs, but now that markets are interconnected, currency fluctuations, especially between the big pork producers (China, USA, EU-27, and Brazil) present an ever-changing playing field that traders must negotiate every day.

Similarly, prices of inputs such as feed, fertilizer, and energy all add separate but connected layers of uncertainty to the mix, as do transportation costs. When COVID-related supply chain issues disrupted international container shipping and sent rates skyrocketing, pork shipments also became much more expensive, fast. Extreme weather in one part of the world can now send prices up on the other side of the planet.

As we described in The impact of African swine fever on the European pork market, ASF also had a profound impact on global pork prices. When China lost hundreds of millions of pigs after its ASF outbreak, it sent shockwaves through the global pork market. As an analyst reported to the Guardian, “The problem is that total global pork exports in 2018 were 8 million tons, and China is short 24 million. There just isn’t enough pork in the world to fill the gap.”

Now, widespread international inflation and the Russian invasion of Ukraine are ratcheting uncertainty even higher. Pig producers already need to pay more for every single input, and we are only at the beginning of what might be a stubborn international inflationary cycle. The likely reduction or removal of Ukrainian and Russian wheat, soy, and corn (maize) from many world markets will hurt millions and further exacerbate volatility. Natural gas is a key ingredient for production of fertilizers. Russia, which until very recently was responsible for 14% of the world’s fertilizer exports, has stopped exporting these. Potash, of which Belarus is the world’s third-biggest supplier, is priced higher now than in the last 13 years.

Pork product producers prepare for a bumpy ride

Given the inherent market volatility, sourcing pork products at the right price and quality is always a challenge. When prices increase steeply and fast and the usual supply sources suddenly dry up, the changes can be especially difficult for small and medium sized buyers who lack the leverage of bigger players.

In times like these it is particularly important for pork procurers to broaden their supply horizons to reduce their dependence on one or a few sources. The greater your flexibility and the more buying options you can make for yourself, the better your chances of staying upwind when the weather gets stormy.