Cranswick, the pork products group, is in talks with supermarkets over raising its prices and passing on higher pig costs, driven to a three-year high by high feed prices and the impact of enhanced husbandry standards.

Cranwick shares lost nearly 6%.

The UK pig price has, contrary to many expectations, continued to rise despite the pressure on farmers from higher feed bills, swollen by particularly poor domestic wheat and potato harvests, at a time when values tend to suffer a seasonal decline.

Furthermore, enhanced European Union pig accommodation standards, while already in operation in the UK, were expected by many as forcing herd liquidations on the Continent, giving a temporary lift to regional pork supplies.

'Trend has not been followed'

But UK pig prices as of the end of September reached 154.75p per kilogramme, up 1.29p in a week and by some 7% year on year, according to industry group BPex.

"Generally, prices tend to fall from the summer before stabilising again during the Christmas period," BPex said.

"However, this year the trend has not been followed as tighter supplies on the Continent have resulted in higher pig prices, which have begun to impact British prices."

Slaughter rates in the UK showed a small decline, down 1% year on year, as higher pig values reduced the temptation among farmers to liquidate herds in the face of higher costs, although sow numbers – an indication of breeding hopes - have shown a decline.

'Discussions on price increases'

Cranswick, whose brands include Simply Sausages and The Black Farmer, said that it had offset some of the impact of rising pig prices through efficiency savings.

However, it cautioned that, with further increases in UK pig prices "anticipated", it had opened talks with its customers, which include supermarket chains Asda, Sainsbury and Tesco, over raising its prices.

"This is an issue affecting the whole supply chain, and the scale of the inflation and the need to ensure continuity of supply will necessitate discussions on price increases with the group's customers," Cranswick said.

"These are underway."

'Core holding'

Cranswick - reporting a rise in underlying turnover for the April-to-September period, the first half of its financial year - said that it was "confident in the continued long term development of the business" despite the pressure on costs, a comment which found some echo in the City.

"On a medium-term view, Cranswick with its strong management team, a track record for… robust cash generation which has supported over 30 year of unbroken dividend growth should represent a core holding in UK small and mid-cap funds," Shore Capital analyst Darren Shirley said.

However, Mr Shirley added that "it is reasonable to assert that there is much less visibility to our second-half forecasts than would normally be the case at this juncture".

'Downside risks'

At Panmure Gordon, Damian McNeela said that "rising UK pork prices are likely to exert pressure on [Cranswick's] margins though the second half, and as such there are downside risks to our forecasts dependent on the timing of the outcome of price negotiations" with retailers.

However, he added that "much of this uncertainty has already been factored into the stockmarket valuation" of the group, which trades at 5.9 times 2013 earnings before interest, tax, depreciation and amortisation (ebitda), compared with a sector average multiple of 6.2.

Mr McNeela retained a "hold" rating on Cranswick shares, with a price target of 875p.

The shares closed down 5.9% at 745p in London.