Last week's export data for July was another chapter of good news about U.S. pork exports this year. The details appear elsewhere in this week's Weekly Preview, but having that data allows us to compute a fresh set of demand indexes for pork, beef and chicken. As you know from past discussions, the same data also allows us to look at monthly real per capita expenditures (RPCE), another measure of demand strength or weakness.
Figure 1 shows our traditional demand indexes for the three major species. All observations from 2010 and before are for calendar years. The last observation on the chart (for 2011) is for the 12 months from August 2010 through July 2011. The reason I use a 12-month rolling average is that there is a fair amount of seasonality to pork demand, and taking a partial year would mean we are comparing only a portion of that seasonal pattern to seasonal patterns in the past year. That comparison could be either positive or negative, but could almost certainly be misleading.
July's pork demand index was 0.5% lower than that of July 2010 but, given the strength of pork demand since last summer, the 12-month rolling index is still up 4.8% from the same month one year earlier. Beef demand fell by 1% relative to last July, pushing its 12-month rolling index down to +0.75%. Chicken demand declined 2% in July relative to last year, but again based on past months’ strength, its 12-month rolling index is still up a healthy 4.8%.
The bottom line on meat demand is that it is softening somewhat relative to the past year. July marked the first month since August 2010 in which the monthly index was lower than one year earlier. But three of the past four months have seen year-on-year declines for the beef demand index. and the chicken index has been lower than one year earlier in two of the past four months.
Pork Expenditures Stay Healthy
Monthly real per capita expenditures for pork (Figure 2) were $0.52 (5.3%) lower in July than in June. July’s expenditures of $9.43, however, were still slightly higher than one year ago. Year-to-date expenditures of $67.40 are 5.5% higher than one year ago, reflecting the relatively strong demand we have seen all year.
Mixed News for Corn Crop
This morning's monthly Crop Production and World Agricultural Supply and Demand Estimates from USDA contained mixed news for corn. USDA pegged the national average corn yield at 148.1 bushels/acre, down 4.9 bushels/acre from its August estimate of 153 and one bushel lower than the average of analysts' pre-report estimates.
The yield reduction took 423 million bushels off USDA's 2011 corn crop estimate but still leaves it, at 12.497 billion bushels, the third-largest crop ever and slightly larger than the average of analysts' per-report estimates. That combination has pushed prices lower in early trading on Monday morning.
The smaller crop will necessitate lower usage in the coming year. USDA's lower feed/residual usage (down 200 million bushels) was attributed to "lower expected residual disappearance with the smaller forecast crop." I guess USDA figures producers and handlers will work much harder to not lose corn valued at $6.50 to $7.50/bushel than they would have had it been valued at ONLY $6.20 to $7.20/bushel, the August price forecast.
USDA also reduced ethanol usage and exports by 100 million bushels from their August levels but increased non-ethanol food, seed and industrial usage. That category is comprised primarily of high-fructose corn syrup, so we can understand an increase given sugar prices.
Corn Carryover Stocks
Those changes put 2012 projected carryover stocks at 672 million bushels, only 42 million lower than the August estimate and about 40 million HIGHER than the average pre-report estimate. The new projected year-end stocks-to-use ratio is 5.3, down only slightly from last month's 5.4%.
At first take, I fear that both of the numbers for this year may be too high. As can be seen above, I don't think we will get 200 million bushels of feed/residual usage due to making the residual less. That means we must reduce feed usage by 200 million bushels or 4.1%!!
Even if you think the residual can account for half of it, feed usage would have to fall by over 2%. Can that be done? Hog numbers are not likely to fall and may increase slightly. Lower weights and efficiency gains would likely leave hog feed usage constant. Chicken production will decline, perhaps by 2-3%. Cattle on feed will remain higher than last year until January or February, half way into the 2011-12 crop year. Feedlot inventories may fall sharply in the second half of the year, but could feed use there fall enough to pull the total down by 2%?
USDA's 2012 carryover stocks still look a bit rosy to me. Corn prices may be about as high as they will go, but I still see nothing short of an oil price collapse or HUGE wheat crops that could exert very much downward pressure until next year's crop comes into play.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.