Consumer-level pork demand remained strong in May, leaving pork’s demand index higher than the indexes for beef or chicken when compared to year-ago levels (Figure 1). The last observation for each index is for June 2010 through May 2011 vs. the same period one year earlier. All other observations are for calendar years.
Pork demand is 4.5% higher than one year ago, primarily due to significantly higher retail pork prices. The index for the month of May (as opposed to the 12 months ending with May) was 6.7% higher than that of May 2010, extending the string of higher year-on-year demand indexes to nine months.
The average retail price of pork in May, according to USDA’s Economic Research Service, was a record $3.484/lb. Deflating that price to 1982-84 dollars, the average “real” price of pork was $1.542/lb., 10.55% higher than in May 2010. Note that the base year for deflating prices is not important. One could base the prices in any year using a price index (I use the Consumer Price Index for all items here) and still come up with the same year-on-year percentage change – and that (10.55%) is the important number for these calculations.
With 10.55% higher prices, one would expect per capita consumption to fall by 7.9%, based on an assumed elasticity of demand of -0.75. Per capita consumption actually fell only 1.74% in May vs. one year earlier. U.S. consumers did not reduce the quantity of pork they purchased by as much as would have been expected with a steady demand curve. Therefore, demand was higher in May 2011 vs. 2010, and the calculation tells us that the shift amounted to 6.7%.
The same calculation using the average percentage change in price and quantity for the past 12 months gives us the 4.5% increase in demand for the June ’10 through May ’11 period.
It should be noted that, even though their trailing 12-month indexes remain positive, the indexes for both beef and chicken were lower than one year ago in May. The index for chicken was 1.3% lower while the beef index was down 3.9%. These drops coincide closely with the cooling of the economic recovery and a drop of the National Restaurant Association’s Restaurant Performance Index to a value below 100 for the first time since November. Those all make sense since beef and chicken demand both depend more heavily upon restaurant sales.
Big Birds Add to Chicken Inventories
Friday’s Cold Storage report from USDA indicates that frozen pork inventories of 496.6 million pounds, 20.3% more than one year ago, were still ample on June 30. But pork stocks were lowered by nearly 10% during the month – a faster pace than the 6.3% average drawdown for June over the past 10 years. Only ham and “unclassified” inventories grew during the month, while stocks of ribs (-45%), butts (-26%), bellies (-18%) and loins (-10%) were markedly reduced. As Figure 2 shows, frozen pork stocks are near the mid-point of their historic range – not a reason to expect price strength, but neither a reason for any big concern.
The spot for concern remains chicken inventories, in general, and breast meat inventories in particular. Total chicken stocks were 13% higher than one year ago on June 30. Breast meat stocks remain 47% higher than last year and were unchanged during June. Wing stocks are nearly double their June 30, 2010 level and grew by 6% during June. Leg quarter stocks did decline during June, but they remain 14% larger than one year ago.
These stocks and concurrent low prices for breasts and wings are finally driving action on the part of chicken producers. Egg sets have averaged 3.5% lower since dropping below year ago levels the first week in May. Chick placements have averaged 3.4% lower since dropping below year ago levels the first week of June.
Those reductions have yet to be realized at broiler processing plants but should be seen soon. Broiler slaughter is down only fractionally since May and production remains higher (+2% the week of July 17) due to higher average slaughter weights.
Year-on-year slaughter reductions are imminent, but production may only drop back to year-ago levels if the mix remains tilted toward big birds headed for boning. The glut of breast meat and very low breast meat prices should tell broiler companies that they are raising too many of these larger birds, although the message does not appear to be getting through – yet!
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.