“When will consumers start pushing back against higher retail prices?” This has been a common question in recent months as pork producers see higher hog, cutout and retail prices. “Just how much will consumers pay for a pound of pork before looking for alternatives?” they ask.

It’s a good question, but I don’t think we have seen the limit – yet. Last week’s retail price data support my position. First, we must think about what is driving higher consumer prices. If it is a significant tightening of supplies, then consumer pushback in the form of lower quantities is simply the flip side of the higher prices. In other words, which came first – lower output, thus lower consumption, or higher prices, thus lower consumption?

However, if higher prices are being driven by an increase in consumer-level demand, then it is quite possible that both price and consumption could increase or, at least, that high prices could be accompanied by constant consumption levels. In that case, the consumer is driving the price increase, not the producer. A consumer more willing to pay for a product is the essence of higher demand.

Why is This Year Different?
Per capita pork consumption has been lower this year vs. one year ago by 0.8%, 1.5% and 3.3% in January, February and March, respectively.

Does that mean consumers have bought less? Of course, but the biggest reason they have bought less pork is that less pork has been available at the retail level. U.S. pork production for the first 13 weeks of 2011 (monthly data for March still not available) was 1.4% higher than in 2010. But higher U.S. exports and population growth have driven per capita disappearance = availability = purchases = lower consumption. Therefore, retail price should indeed be higher.

But retail prices have increased by even more than what we would expect given the reductions in per capita supplies. The average retail pork price has been 11%, 10% and 12% higher than in the first three months of 2010. The March average price of $3.357/lb. is the second-highest ever, falling just 0.6 cents/lb. short of last October’s record.

So, thus far, U.S. consumers are buying everything we bring them and are doing so at higher prices. That doesn’t mean they won’t back away from the product, but the evidence does not suggest such behavior at this point.

A key piece of that behavioral puzzle is the price of other meats and that story is mixed. Beef prices set another new record in March with “choice” beef averaging $4.747/lb. and all-fresh beef averaging $4.476/lb., 10.2% and 13.1% higher, respectively, than last year. Year-on-year increases for choice beef have been 10% or more each month this year, while increases for all-fresh beef have been 12.5% or larger each month. Those large increases obviously leave pork very competitive even at this year’s higher prices.

Chicken prices, on the other hand, have not kept pace with either pork or beef. The composite retail broiler price was up 6.4% in March, but that followed gains of only 1.6% and 2.6% in January and February as chicken supplies stayed about 3% larger during the first quarter.

What Lies Ahead?
What will happen over the next few months? I expect beef prices to remain very strong even though we are now past the normal seasonal peak for cattle prices. While feedlot inventories are higher than a year ago, they are not large from a historical perspective. After these inventories are gone in late summer, the feeder cattle supply situation will get very, very tight. Consequently, beef supplies will be supportive to pork prices well into 2012.

The situation is not as certain for chicken. Margins there remain negative for most companies and there is talk that some smaller players are running out of cash. Last fall’s large output increases have waned, but there have been no real cutbacks yet, which means price gains will remain small. Costs are not going down appreciably, so the same high costs and the same price levels mean continued losses. Something will indeed give, but chicken will remain very competitive in the short run. I look for chicken prices to rise in the second half of the year – also supportive to pork prices.

Now if we can just pay the feed bills.

Click to view graphs.

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