It has been a tough week for pork cutout values. After showing some signs of expected seasonal strength last week, the cutout value fell from Monday through Wednesday, before gaining $0.94/cwt. on Thursday. That still puts it at $2.13 below last week and over $12 lower than last year.
Altin Kalo of Steiner Consulting Group, writing in Thursday’s Daily Livestock Report from Chicago Mercantile (CME) Group, pointed to lagging loin prices as one of the key reasons for the continued weakness in the pork cutout value. Figures 1 and 2 show prices of ¼-in. trim, 21 lb. and down loins on a long-term and year-on-year basis, respectively, and they do indeed suggest that loin prices are low on a historical basis.
Why the weakness? First, I’ll not climb fully onto my muscle quality soap box, but will still point out that a good portion of the loins we sell have problems and have thus reduced consumer confidence in this product. Enough said on that for now.
Second, prices of alternative proteins are low. Boneless, skinless chicken breasts are still around $1.50/lb. at the wholesale level and that makes a very competitive product for pork loins. Ditto for many high-quality beef cuts. Rib eyes and sirloins are still more expensive than loins, but they are cheap relative to history and are probably attracting a big chunk of what “splurge” money there is in consumers’ grocery budgets.
Third, loins are quite dependent on exports. Look at the surge last summer. More importantly, look at the double-topped surge last summer with the second top corresponding to the July and August explosion of exports. Lower U.S. exports are hurting loin prices and one major reason for lower U.S. exports is higher Canadian exports. My sources indicate that Canadian packers are boning a very high percentage of loins, most of which are destined for Japan and Korea.
Why? First, a lower Canadian dollar makes Canadian product more cost competitive. Second, Canada’s packers are running much closer to capacity this year due to more hogs staying in Canada because of mandatory country-of-origin labeling (COOL), providing them with product to export. A shift of pork exports from the United States to Canada was one of the COOL impacts I and others predicted very early on.
But Pork Demand is Still Good
On the positive side: March consumer level pork demand was excellent as evidenced by very good domestic pork disappearance (assumed to be domestic consumption) and strong retail pork prices.
Since we do not yet have March production or trade data, a few assumptions were made to arrive at the March data. First, even though weekly slaughter rates have been about 4% lower since March 1, actual federally inspected (FI) slaughter for March was virtually identical to 2008, because March 2009 contained one more weekday and one less Saturday – a gain of about 300,000 head for the month. Second, carcass weights were half a pound (only 0.25%) higher, so March production will be virtually the same as last year. Finally, I assumed that imports and exports for March would be the same percentage of 2008 as year-to-date imports (-8.3%) and exports (-10.8%), on a carcass weight basis. The net result of these assumptions is that disappearance/consumption was the highest in any March since 2004 and the six-month moving average for monthly disappearance was the highest ever for March (see Figure 3).
But quantity is only part of the demand picture. The other factor, of course, is price and USDA’s retail prices for March indicate that the nominal pork price ($2.942/lb.) was 3.8% higher than one year ago. The March consumer price index (CPI, where 1982-84 = 100) was 212.7, indicating that the general price level has actually fallen since March 2008 when the CPI was 213.5. Therefore, none of the increase in the retail pork prices was due to inflation. In fact, the real (or deflated) price increase was larger than the nominal increase. Needless to say, that doesn’t happen very often.
Higher consumption and higher price means higher demand – a fact born out by Figure 4, which shows monthly real per capita pork expenditures (RPCE), a very close proxy for the demand indexes computed by the University of Missouri. The March RPCE figure indicates a demand increase of 5.1% from March 2008, and leaves Q1-’09 demand, on average, 6.1% higher than one year ago.
So why have wholesale pork prices and, thus, hog prices, lagged so badly thus far in 2009? All of the same factors impacting loin prices have impacted wholesale pork markets, in general. It’s a buyer’s market right now. But retailers correctly fear that wholesale prices are poised to move sharply higher and they don’t want to get caught in a cost-price squeeze when that happens. Plus, they want to avoid cutting selling prices now and dealing with irate shoppers in a few weeks. Consequently, retail prices have remained high even as wholesale prices have languished.
I firmly believe it is a matter of time before that situation rectifies itself. But it also appears likely that the rally in wholesale and hog prices will be insufficient in terms of magnitude and length to return the industry to economic health. Further reductions in output will be needed to accomplish that goal.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.