On several occasions, I have written that this year’s prices have been significantly higher than supply levels have justified. Instead of the usual -2 to -4 price:quantity multiplier – what we economists call price flexibility – the relationship has been -6 and -8 and, sometimes, even -10 this spring. This means that a 1% decline in pork supply has driven, at times, a 6% or more increase in the cutout value and hog prices.
There are a couple of reasons for these excellent results that are beyond the direct impact of pork demand. First, the 2009 price to which we are comparing was unusually (and perhaps artificially) low last spring and summer due to H1N1 influenza concerns and some supply issues – more hogs than expected and much higher weights than expected. Second, sharply higher prices for chicken and beef this spring supported pork cutout values significantly as retailers and, to a lesser extent, foodservice operators looked for a better value in protein items and ingredients. While those forces are always in play, they were in force in spades this spring.
It has been difficult, however, to quantify the positive impact that domestic pork demand and export demand may be playing. The numbers have simply not been very good. From January through April, monthly year-on-year percentage change figures for exports were -2.5, +6.0, +0.2 and +2.2, respectively. Not bad, but nothing to write home about. In addition, the index of domestic pork demand through April languished at over 5% below the year-ago levels as retail pork prices remained steady even though domestic pork supplies were sharply lower. All of that seems to have changed in May and June.
Pork Export Strength
May pork exports, on a carcass weight basis, were 18.2% higher than one year ago. May’s export performance pulled the year-to-date figure up from +1.5% in April to +4.6% at the end of May. There is a caveat, of course, in that one reason for the excellent year-on-year comparisons is that May 2009 exports suffered significantly from the unjustified H1N1-related import bans. But growth is growth and this year’s shipments were almost 50% larger than those of 2007 – the last “normal” May in the dataset. May exports also leave the United States above the trend line based on 2004-2007 data (Figure 1) so, while not nearly matching the 2008 “outlier” performance, May makes this year look much better in terms of exports.
Japan remains our largest customer in terms of meat volume and value even though shipments there were 8.6% smaller in May than they were in the record month of April (Figure 2). The monthly decline is a bit of a surprise given the foot-and-mouth disease problems Japan has dealt with recently. Could the decline be an indicator of the negative impact that a foreign animal disease outbreak has on demand? May shipments were still 13% higher than last year, but year-to-date trade with Japan is still down 3.4% from 2009.
Shipments to Mexico declined again in May, but are still over 45% higher than last year’s H1N1-depressed levels. That demand damage in 2009 was not, you recall, due to any action by the Mexican government, but was a reflection of soft Mexican pork demand as fear drove consumers away from pork. Mexico remains the top destination for pork variety meats with those shipments up 7% in volume and 27% in value thus far in 2010.
Another bright spot was the return of Russia as a significant destination for U.S. pork. While May exports to Russia were still 38% smaller than last year, May shipments were over four times those of April. Renewed shipments of chicken to Russia may put some pressure on pork exports from June onward, but we have to be better off now than we were before the agreement on tetracyclines was reached.
Retail Sales Steady
The other positive demand factor is the recent rise in retail prices (Figure 3). As can be easily seen, the retail price of pork set its second straight record in June at $3.104/lb. While some may view higher retail prices as a bad thing, they were inevitable in this situation. Higher costs drove supply reductions, which have pushed up wholesale values and hog prices. Retailers held the line on prices for a while, but have now had to start increasing them to reflect the higher costs of products coming into their stores. Retailers had some product bought for future delivery, so they held prices steady because they really don’t like heated discussions with irate buyers!
It is a good thing that consumers value pork enough to pay more for it. That should be our goal in everything we do – to create greater value in the minds of consumers – because then and only then will they part with more of their hard-earned dollars. And then and only then should we ask them to do so!
But, as you’ve read here before, this rise in retail prices is not confined to pork. Turkey prices are within $0.006 (e.g. less than a penny) of their all-time high. The all-fresh and choice beef prices are only $0.022 and $0.035, respectively, below their record highs. Only the composite broiler prices have much ground to cover to make a new record and even that is less than 10 cents/lb.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com