The status of meat demand in general, and pork demand in particular, is a bit of a mystery at present. Professor Glenn Grimes of the University of Missouri recently released his first demand index computations for 2007 and the numbers were not at all pretty. The index for consumer-level pork demand is down 1.7% for January through March of this year, while choice beef demand was 0.8% lower and broiler demand was down a whopping 6.4%.

Professor Grimes' indexes measure the percentage change in demand vs. the same period one year ago. The demand indexes use per capita pork disappearance (assumed to be consumption), deflated retail prices and an assumed elasticity of demand to estimate the movement of an entire demand curve. (I have presented Professor Grimes' calculated numbers for demand elasticity of -0.75) These numbers do not represent a change in consumption or a change in price, but the relative changes in both variables.

The problem is that Professor Grimes' data, which are theoretically sound and correctly computed, do not square well with what we have seen at other levels of the meat industry this year.

Hog prices and pork cutout values have been substantially higher than one year ago in spite of production that is up 1.6%, year-to-date (YTD). Beef cutouts and fed cattle prices are higher, too, on production that is 1.4% higher, YTD. Wholesale chicken prices have been much higher, though one reason for that is a reduction of output that has been as large as 4.5% and is still 1.5% lower than in 2006.

The first two definitely imply higher demand for hogs and cattle at the producer level and pork and beef at the wholesale level. The last of those does not rule out higher wholesale chicken demand depending on the relative size of the price and consumption changes.

Another way to look at demand is to look at scatter diagrams that plot price-quantity pairs for specific time periods. Figures 1 through 3 show scatter diagrams for the first quarter of 2007 for pork, beef and broilers at the wholesale level. That is, the diagrams plot the deflated cutout values for beef and pork and deflated composite broiler price for broilers against first quarter production. The important thing about all three is that the 2007 observation is at least no closer to the origin of the graph. That means that wholesale demand is at least as good as last year for beef, slightly better for pork and, interestingly, much better for chicken.

Why the difference with the retail level demand indexes?

First, there are substantial time lags for price transmission. Retailers and foodservice operators will "eat" higher wholesale prices for some time before they mark up retail and menu prices. The reason is simple. Their customers don't like price increases and these business people are not interested in making life more difficult. On the other hand, prices are transmitted to the wholesale very quickly and thus would appear in these quarterly graphs.

Second (and you have heard me whine about this before), the retail price data are not very good. We had a system in place for three years that was gathering scanner price data for meats, but it lapsed when the U.S. Senate allowed the mandatory price reporting legislation to lapse in the fall of 2005. That legislation has finally been reauthorized, but USDA has neither issued new price reporting rules nor restarted the scanner price gathering effort. There is talk of getting it going again, so there is hope that we will have better retail data in the future.

Third, and possibly most important, exports have an impact on wholesale prices but not necessarily on retail prices. Exports are up for all three species this year, so this is a major factor.

Of course, the bad part of this story is the position of the 2006 price-quantity observation for pork. It was substantially below the 2004 and 2005 positions and reflects low chicken prices last year and a decline from the big demand surge in 2004 that was driven by high protein, low carbohydrate diets. But 2006 is history and 2007 appears to be off to a much better start. Let's just hope the remaining quarter can maintain that growth trend!




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com