What is in store for pork and hog demand? The answer to that question will likely determine the revenue side of the hog profit equation this fall. While the past two weeks have seen the largest hog slaughter runs of the year, total slaughter since June 1 has been only 0.2% larger than the level suggested by the June Hogs and Pigs Report. I don’t expect fall slaughter to be substantially larger than what we have seen. The USDA’s Hogs and Pigs report, released Wednesday afternoon, will shed plenty of light on that subject. If supplies remain manageable, demand will quite logically be the key determinant of prices and revenues.
First, let’s consider domestic, consumer-level demand. There are several reasons for concern but first and foremost is the state of the U.S. economy. The stock market is still struggling. Consumer sentiment took a tumble in August and it is hard to see how the stock market situation will help that number in September and beyond. Unemployment remains high. Job creation is slow. The housing market is still very soft and will remain that way for a long time, in my opinion, as there are plenty of houses available and not near enough qualified buyers to take them off the market.
The July pork demand index was lower than that of one year ago. That was the first time in nearly a year for a negative year-on-year comparison of the monthly demand index. I don’t believe it was a coincidence that the National Restaurant Association’s Restaurant Performance Index fell below 100 (the level that separates expansion from contraction of the sector) for the second time in three months. It also reached the lowest level since August 2010. I don’t expect the August index to be much better.
But there are reasons to be optimistic. Though not immune, pork is historically less subject to foodservice slowdowns than are beef and chicken. Second, it is September. As I noted a few weeks ago, U.S. consumers have historically paid well for large supplies of pork when the weather cools in the fall. No reason to think this year will be different.
Finally, pork demand should get some help from higher beef and chicken prices. Figures 1 and 2 show weekly beef and broiler production data for 2010 and 2011, as well as the 2005-2009 averages. Both figures are still higher, year-to-date, for 2011 vs. 2010, but have begun running lower than one year ago in recent weeks. Broiler production since mid-August has been 2.5% lower than last year, while beef production has been 1.7% lower than in 2010 over the same time span.
And the reductions will almost certainly get larger. Broiler egg sets have been 6.3% lower than last year since the first of June – so broiler slaughter and production will almost certainly decline further. Cattle placements in August were slightly lower than one year ago, but over 8% lower than the level expected by analysts. More important, placements of cattle weighing 600 lb. or less were up more than 220,000 from last year and the placements of cattle weighing 700 lb. or more were down more than 208,000 from last year. Placing that many calves and still falling short of expectations means that cattle and beef supplies are going to get much tighter as we go through the winter months.
So does that translate to strong pork demand? Maybe. The actual mechanism through which supplies of competitor products impact demand is the price of the competitor products. As can be seen in today’s data tables, beef prices are indeed higher than last year, so they are likely already having a positive impact on pork demand. That impact could certainly grow, though, as supplies become tighter and beef prices climb higher yet.
Chicken, on the other hand, remains generally at or below the price of last year. Leg quarters are the only product whose price is higher and that price is driven by exports. Getting some price traction from lower chicken supplies has proven to be a challenge, but I believe it will happen eventually, thus strengthening pork demand.
The other component of hog demand, of course, is exports. The year has been very good thus far, but there are a couple of challenges brewing. Both the Mexican peso and the Brazilian real have lost about 8.5% of their value relative to the U.S. dollar over the past six weeks. I believe that is a “flight-to-safety” symptom as the world economy slows again. But the implication is that the price of U.S. pork has risen in Mexico and the price of Brazilian pork in the world market has fallen relative to the price of U.S. product. The changes aren’t large yet and may not get large enough or last long enough to have a material impact, but they are certainly worth watching.
The net of the situation is that I am still optimistic about hog demand. Continued strength is not at all guaranteed but the balance of the impacts, I believe, will leave demand relatively strong into 2012.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.