We all know demand is not what it should be, right? But which demand are we talking about? Specifying just where any demand problems may lie is a point upon which even I have not been clear enough lately. In addition, what I am seeing in hog prices is not squaring with information I’m hearing about consumer attitudes and behavior. So I did a little number crunching last week.
First, a bit of background. Hog prices have languished far below last year’s level and levels where virtually everyone expected them to be this summer. But does that mean pork demand is bad? Well, sort of, if you are talking about wholesale demand, which is closely correlated with hog demand since wholesale prices and by-product values are the major determinants of hog bids.
But why is wholesale demand soft? We know exports are very soft given the difficulties we face with pork demand in Mexico and political gamesmanship by Russia and China. But what about domestic demand? It has to have been hurt by all of the “swine flu” talk and sick people and a few related deaths, right? Funny thing, though, the National Pork Board’s tracking surveys have shown that consumers understand that pork is safe and, after an initial setback, responses indicating a willingness to buy pork have bounced back. So is it just exports? I went back to my data files and did a bit of ciphering to see if I could figure out a bit more about what is going on.
Let’s go back to April 24 (wouldn’t we like to do that knowing what we do now?). At that time, Chicago Mercantile Exchange’s Group Lean Hogs futures indicated a normal seasonal rally of a little over $10/cwt carcass (see Figure 1). Let’s call those expected prices since a lot of people were betting real money on them, thus bringing a great deal of collective information and brainpower to the marketplace.
On April 24, there was also an expected level of slaughter. My calculation is represented by the red line in Figure 2. It is based on the year-on-year changes in the inventory of pigs of various weights in the March Hogs and Pigs Reports and some adjustments for lower imports from Canada and historical relationships. On average, my expectations for weekly slaughter since March 1 had been almost perfect relative to actual slaughter but, as you can see, averaging baled me out some weeks when the actual slaughter was either higher or lower than my expectations. Now, everyone’s expectations were not the same as mine but they were probably pretty close since mine were based on the major sources of public data. Let’s add in some “expected weights” and we get “expected supply.”
So we have a set of expected supplies and expected prices. So what changed to make the actual prices (the fuscia line in Figure 1) and new price expectations (the red line in Figure 1) so much different? Demand went in the tank when H1N1 flu hit, right? Maybe not.
Consider the following numbers:
- Mexico took 3.7% of U.S. commercial pork production in January through March. Last week’s product-weight export data for Mexico showed that shipments were lower in April and at least part of that decline could have been due to H1N1 influenza becoming an issue there even before April 24. So let’s ignore April as tainted data.
- Russia took 1.3% of U.S. commercial pork production in February and March after starting the year very slowly.
- China took about 0.7% of U.S. commercial pork production in March after two months of just less than 0.3%. I include China here just for information. I’m not going to count this as a lost market since Hong Kong is still open.
- Since April 25, federally inspected hog slaughter has been 1.6% larger than my expected levels.
- I expected carcass weights to run one pound higher this summer vs. one year ago. Since April 25, weights have been roughly two pounds or 1% larger than I had expected.
Add up the non-China items and we see that the supply of pork to U.S. consumers is 7.6% higher now than I, and very likely many others, expected to be the case at the end of April. That is a lot of extra pork to sell!
Is the difference between actual/expected prices commensurate with this change in supply? Yes, they pretty well are. Using a price flexibility (ie. the percentage change in price for a one percent change in supply) of -2, the change in expected supply would be expected to drive prices 15.2% lower. Comparing actual cash prices through June 5 and June 5 futures prices to the April 24 futures shows that prices fell -9.1% below the expected level the week of May 1 and the decline grew to -14.1% last week. The June 5 futures prices suggest that the impact will be about -20% this week and fall to -17 to -18% through July 10.
Those numbers aren’t precise but economics is not chemistry. They are reasonably close and they suggest that EXPORTS ARE THE BIGGEST PART OF THIS PROBLEM and that DOMESTIC DEMAND IS STILL REASONABLY STRONG. The reason domestic prices are so low (we’ve all heard of $1.50/lb. boneless loins) is that so much product has been placed on the domestic market by a) export reductions and b) higher-than-expected slaughter and weights.
Reduce Slaughter Weights
What can be done? Get weights down as quickly as you can. That’s easier said than done with packers managing pig and product flows carefully but do whatever you can! Eat pork and encourage others to do so! I know you do that regularly but do it more! I’ve told the Pork Board that we need to jump-start pork demand in Mexico. I know they and the U.S. Meat Export Federation are trying but the situation with Mexican consumers is a tough one. And finally, the National Pork Producers Council is doing whatever it can to get Russia and China open – but the rule of international trade law is not highly regarded by the folks on the other side of those talks.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.