Just as kids are reluctant for summer vacation to end and the rigors of school to commence, pork producers usually look from summer good times to the autumn months with some trepidation. “Just how far will prices fall?” they wonder.
Most Weekly Preview readers know the drill very well. Hog supplies begin to grow in August and September as the larger pig crops of late spring and early summer begin to reach market weight. That “bunching” of baby pigs is caused by improved seasonal fertility and conception rates, the impact of cooler temperatures. Likewise, there is probably still some impact of improved sperm count/semen quality as temperatures cool, but the widespread adoption of artificial insemination has very likely offset most of that factor.
As hog supplies grow, prices drop. No rocket science there — pure supply and demand at work. Hog prices fall because there is more product available at the wholesale and retail levels and because packers do not have to scramble nearly as hard to fill their daily slaughter needs. The result is that hog prices drop by a larger proportion than do the wholesale or retail prices and margins at the packer, processor and retailer/restaurant levels usually reach their highest point for the year.
Many people believe that lower pork demand in the fall contributes to this price decline. It’s logical that the end to the grilling season would see lower demand for pork chops, hot dogs, sausages, ribs and butts and put downward pressure on prices. We can’t see all of those people cooking in their back yards and campgrounds and ballparks, so they must not be cooking, right?
Apparently it’s a wrong assumption. The fact is that pork demand is virtually always at its strongest in the fourth quarter of the year. Figure 1 shows real per capita expenditures (RPCE) for pork, by month, from 2000 through June 2011, the last month for which data are available. RPCE is virtually the same measure of consumer pork demand as the demand indexes developed by Professor Glenn Grimes at the University of Missouri. The only computational difference is that RPCE simply depends on the negative relationship between price and quantity that actually exists in the market place at a given point in time where demand indexes use an assumed coefficient for that negative relationship. In addition, RPCE is simply the average number of dollars each person in the United States spends on pork in a given month with those dollars all stated in a base period – here, the year 2000 – to remove any impact of inflation.
In all but three of the past 10 years, the peak of monthly RPCE has occurred in either November or December. Of the three exceptions, two occurred in September and one occurred in October. The reasons for this strength are that Americans buy and consume a lot of pork in the fourth quarter of the year and they pay prices higher than a steady demand curve would require. It is not that prices do not decline; they just don’t drop as much as would be expected if demand remained at the same level as in the summer. So while we can’t see people cooking and consuming as much pork, they must be doing so in the privacy of their homes or indoors at restaurants.
Prices decline because the increases in hog numbers and pork tonnage still overwhelm demand. Again, autumn prices fall, they just don’t fall as much as they would if demand remained constant.
Figure 2 shows weekly average negotiated prices for every year since mandatory price reporting began in 2002. Note that in only one year (2008) prior to this year has the year’s highest weekly price occurred in August. In that year, hog prices plunged dramatically to their November low. The drop from $88.61 to $51.35 was 42%. The same kind of decline from this year’s record high of $107.62 would take the fall low to $62.15/cwt., carcass.
Could such a drop happen again? Yes, but it’s not likely. The average decline in hog prices from August to November over the past 10 years has been 19.5%, according to the Livestock Marketing Information Center. The data depicted in Figure 2 would peg that number at 18.1%. Working from this year’s record high of $107.62, those projected seasonal declines would put the November price at $86.63 and $88.14, respectively.
December Lean Hogs futures (Friday’s close was $83.10) are currently predicting a greater-than-normal seasonal decline. That is quite logical given that we began the decline at a much higher-than-normal seasonal peak. A soft economy, plenty of cattle in feedlots (though some are far from reaching market weights), and still-low chicken prices would support a larger seasonal decline.
On the other hand, beef demand remains strong, exports are still very good with the dollar being so low, chicken supplies are declining and, while no one is very comfortable with the state of the economy, talk of a financial Armageddon has been a little less frequent in the past couple of weeks. There are some good reasons to be more optimistic than the futures traders at present.
I tend to be in the latter camp given the remarkable performance of this market so far in 2011. All good things must end, I suppose, but this run seems to have some staying power that could keep prices relatively strong through Q4. Now if we could only find some affordable feed.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.