Opinions Frank Steenbreaker
The selling price follows the cost price, but when?
An economic rule is that the selling price follows the cost price. This direct link does not seem to work in pig farming at the moment, although this will only be a matter of time.
It is difficult to predict how long it will take to regain equilibrium. There is currently a war of attrition going on, with major consequences for the liquidity position of pig farms.
In a normal economic situation, economies of scale, increasing production and efficiency gains result in a lower cost price, which is ultimately translated into a lower selling price. The producer who manages to produce at the lowest cost price ultimately determines the selling price for the entire market.
Increased costs
Clearly the opposite is happening right now, but this is temporary. Feed costs increase by at least €12 per piglet and €35 per delivered finishing pig. Energy costs increase by €2 per piglet and €2 per delivered finishing pig. Rising inflation is also followed by rising wage costs. Construction costs are even reaching historically high levels. All this leads to cost prices of €70 per piglet and a minimum of €2 per kilogram slaughtered weight.
Market prices rose to these levels in March and April, before taking another big step back. At the moment pig farmers suffer a loss of at least €15 per piglet and the same amount per delivered finishing pig. This, together with the additional capital requirement due to the increased cost price, has a significant impact on the liquidity position of pig farmers, up to €40 per meat pig present.
War of attrition
You may be thinking: who can keep this up? Companies with a long breath, a residual buffer from previous years and clearly above-average results. But it is now a problem for more and more companies. We notice that every day. The war of attrition is underway. A new equilibrium will arise: a selling price in line with the cost price, both at a higher level, and a smaller supply. It is also a message to the slaughterers and retailers in our sector. The price paid in the market must be structurally much higher at the current cost price. Isn't this happening? Then the supply will drop drastically in the foreseeable future.
Liquidity position
And what can you do as a pig farmer? Tightly plan and monitor the liquidity position for the coming year, estimate the deficit and translate it into whether your company is still sufficiently resilient in the new reality after this war of attrition, taking into account the challenges for the future.
In my work I want to see the opportunities and possibilities together with entrepreneurs, but with reality in mind. This reality teaches us that the selling price will follow the cost price, left or right, but this will take some time. Not a nice message. It's your job to stay at the helm in a tumultuous market, brace yourself.
Frank Steenbreaker
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