It is once again “bash-the -retailer” time in the pork industry. This happens periodically, usually when producers are particularly disappointed in the way that the market has treated them. Low hog prices are compared to steadily high retail prices published by USDA and the conclusion is that the situation just is not fair. Or, as one producer recently declared: “Something is broken here!!” He thankfully left out the expletives that his tone of voice told me were just waiting to burst forth.
First, it is important to understand that the retail price data we work with is not the best. In fact, it may not be very good at all. Figure 1 shows USDA’s monthly data for retail, wholesale and farm level prices. Note that all are computed to a retail weight basis so they are directly comparable and the differences between them constitute a “spread” or gross margin for the firms operating at that level.
These data are computed by USDA’s Economic Research Service (ERS) from data acquired from the Bureau of Labor Statistics (BLS), which gathers the prices as part of its duties to keep tabs on inflation. USDA imputes this composite price from prices of only a handful of pork cuts and that number has gotten progressively smaller.
USDA knows nothing of sales volumes at the different prices it receives from BLS. So, the price in Figure 1 is simply the arithmetic average of the prices USDA receives. That is, pork chops at regular price of $3.89/lb. and those on sale at $1.89/lb., calculates to an average price of $2.89/lb. But which price do you think moved more pounds? The lower price, of course, which means the arithmetic average, would overstate the true weighted average price. And when do more features that potentially would move more product occur? When hog and pork prices are low. So, at the very time that producers are inclined to be critical of retail prices, the data may be overstating them the most.
This is one reason the retail series rarely shows any sharp declines. It picks up primarily everyday prices and weights them equally with feature prices designed to move large volumes of product.
Is there an alternative? Well, sort of. USDA was required by the mandatory price reporting (MPR) legislation to gather retail price data that includes sales volume. That was a backhand way of requiring USDA to purchase scanner data on meat products. ERS and market analysts knew that it would take several years’ worth of data to be useful, so getting started quickly was important. ERS did that in 2002, but quit buying the data when the MPR legislation expired in 2005. Understandable, since funding lapsed without the enabling legislation. They went back and filled in the missing data after MPR was reauthorized in 2007, but quit acquiring the data again in April 2008, and have not done so since.
So, we have no current data to compare to the BLS-based data, even though a government agency is required to gather and publish it and has received funds to do the work. Is this a great country or what?
The idea of those bashing retailers, of course, is that when there is too much pork on the market, retail price should fall in order to move more pork. What is overlooked, however, is that lower retail prices do not drive hog prices upward immediately. They only move larger quantities and, perhaps, reduce cold storage stocks. Higher hog prices occur only when pork production falls. As long as supplies are not backing up, lower retail prices may not accomplish anything other than to reduce retailers’ revenues.
I hope readers can see that actual weighted average retail prices are very likely lower than these published prices. In addition, cutting retail prices beyond the featuring level will move little or no more volume since virtually all of what is being produced is already moving. And, when hog supplies fall, pushing up hog prices, wholesale prices and retail prices at the same time is a long, drawn-out, difficult process. It is much easier to increase wholesale and farm prices if retail prices remain strong.
Is it fair that farm margins are lower, packer margins are lower and retailer margins are higher? No. Will it help the industry to reduce retail prices just for the sake of making spreads fairer? Probably not.
And always remember – no producer receives a dollar that has not passed through a retail store or restaurant. I still think the chance of producers’ incomes returning to acceptable levels is better with more dollars flowing into the pork industry. Slashing retail prices doesn’t get that done.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.