Jim Long Pork Commentary, Road Trip Spain Week 2, October 4th 2021

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Jim Long, President and CEO Genesus Genetics

Our first week, as we reported last week, was at Figan the major livestock exhibition in Spain. The second week we spent traveling to customers and prospects throughout Spain. Our observations:

Many if not all we visited read our weekly pork commentary that’s translated into Spanish. Some comments people quoted “Chicken Little Economists”, “prolapses”, “sow mortality”, “Better Tasting Pork”. All producers we talked to wanted to discuss World Markets. China, USA, Europe, Russia, etc.

Spain has prospered due to the large amounts of Pork they exported to China. Currently, Spain’s exports to China are negligible compared to the past. Some plants told us 70% of their pork output had been going to China. Now they must find new markets within the EU or other countries. It’s a big adjustment.

Producers are wary of the future, current breakeven is between 1.18 – 1.22 Euros kg. The price for hogs is 1.12 Euros kg. Our calculation, it’s about $20 per head loss. The good thing for producers is last week was the lowest price in many months. Losses just began a month ago. This compared to Germany where due to ASF and foreign markets closing have been losing money for almost a year.

Spain has traditionally been a Piétrain sire market. The emphasis has been on lean and chasing the lowest cost of production. The reality with Piétrain, you get fresh pork that tastes like cardboard. No marbling, lighter color, and high drip loss eroding juiciness and weight. There is a revolution underway that packers, exporters, and retailers are seeing that there is a market for better-tasting pork, one that pays more for the quality. We visited three packers who now are using Genesus Purebred Duroc for their premium product. It’s interesting that in Spain the Danish Duroc and PIC 800 aren’t considered by producers – packers as real Durocs but synthetic hybrids. A low to middle-quality pork product is not much different than Piétrain ones that will not give a premium taste, flavor, and price.

Spain is also seeing sow mortality rising, similar to the USA. All from the same genetic culprits. Spanish producers realise dead sows don’t produce pigs.

We were asked if North America had the same pricing organisation as the Mercolleida. Mercolleida is when every Thursday representatives of packers and producers meet to establish the national price for Spain. They were surprised there was no collaboration in North America to establish a price between packers and producers. I was asked how was North American pricing established. It was tough question. Best I could describe was a near adversarial relationship between independent producers and packers. A kind of chaos, each pushing at each other. Different formulas. They were amazed at the daily top and bottom prices reported by USDA. One large Spanish integrator described the Mercolleida pricing as the best way for independent producers to have fair share of total margin. Sounds to us Spanish producers – packers are mostly satisfied with this pricing arrangement. Not too sure that would be the same in USA – Canada.

Spain producers are wary of the feed prices. They import 70% of their feed needs. Price of feed is about 30 – 40% higher than North America which drives up cost of production. North America cost of production is $20 – 30 per head lower.

Packers – Producers are challenged for labor in Spain. Our observation is they are challenged but able to get necessary number of people to get job done. Some Spanish packers picking up business from USA due to cutting needed for specific markets. The labor shortage in USA is preventing some market demand products to get job done. Advantage Spain.

Travelling A-2 highway in Catalonia, Spain. Have to say never saw more pig barns or trucks hauling hogs. A truck every minute. Huge concentration of swine production.

As we visited Spanish producers and packers, we were taken by the tremendous hospitality we were afforded. Lots of time for discussion, excellent lunches and dinners with many of them featuring their own pork products. The welcoming we received is much appreciated and is a shining example to the warmth of Spain’s industry.

Spain’s pig and packing industry is for all interests and purposes family-owned private companies. Everywhere we visited we met the family owners. They all have skin in the game and pig production is in their blood and main business. What we also found interesting is there is discussion regular between many of them maybe it’s because of the Mercolleida weekly group pricing culture, we saw many large producers talking to each other. This is different than North America where not much of this type of dialogue happens.

As we wrote last week, Spain is the third-largest producer in the world. They have created an aggressive system with a country-wide collaboration that lead to growth. We expect Spain would hold their sow herd over the next several tough profit months. Spain will benefit by the ongoing sow herd liquidation in North Europe. In future, Spain will ship pork to the market of EU gaining domestic market share. Part of that growth is the move to a greater production percentage of premium pork. Smart business people see the value and profit in selling superior quality products.

China was a big discussion in all our meetings in Spain. Our observations. There is huge liquidation going on in China. Just weaned pigs are selling for $10 USD. The China market hog price was touching 11 RMB/kg last week breakeven is over 20 RMB/kg. The difference, about $125 – 150 per head loss. Sow price is 6 RMB/kg. A sign of liquidation. ASF still raging, PRRS, PED. Lots of dead pigs. Losses of over $100, producers can’t pay bills. A major global vaccine company told us at Figan that they were no longer sending any product to China. China producers are losing as much money per head as we have ever seen. Some of the huge public swine companies in China borrowed billions of dollars to expand last year. They have expanded into a terrible market. The reckoning is here. Some won’t survive. Just like in USA 1998, when dust settled most of the companies that grew in the 90’s had new ownership. Smithfield pig production grew out of that crisis taking over financially challenged established producers. We expect similar in China. Who will survive, who won’t, we have no idea. The one truth in this business, when producers lose money you end up with less hogs. The greater the losses, the greater the adjustment. China has losses currently almost beyond comprehension. Sometime in 2022, China’s price will recover aggressively and once again China will need imported pork. It’s not if but when.

USA

The September 1st Hogs and Pigs Report indicating less pigs year over year has helped push lean hog futures up $20 per head in the last two weeks. What we see is less hogs in North America, liquidation in Europe, liquidation in China, less hogs globally in 2022. Already all hogs for market are bred until July 2022. Not much chance of expansion before late 2022 and we don’t think expansion will happen that fast. Our thoughts are, current 2022 lean hog futures are undervalued when we consider fewer hogs globally in 2022. Exports will rebound and domestic demand should be strong.

Left to right: Mercedes Vega Gonzalez General Manger of Spain, Italy and Portugal for Genesus, Eduardo Costa Casas CEO of Piensos Costa, Jim Long CEO of Genesus, Jorge Costa CEO of Grupo Empresarial Costa and Spencer Long of Genesus standing in front of the Sommos Winery in Barbastro, Spain. The Costa Food Group owns the winery. Costa Food Group is a World Mega Producer (150,000 sows)

Genesus team at the Figan show in Zaragoza, Spain