September 14, 2020
I'm tired of bad news. Fortunately, I've found some good news to write about this week.
In spite of the havoc wreaked by COVID-19 on the U.S. economy, pork demand seems to have recovered. You read that right. It's been a wild ride, but the most recent data (and I really like to lean on data!) tell us that consumer-level demand is close to where it was one year ago.
Figure 1 shows monthly real per capita expenditures for pork. This is my preferred metric to estimate the position of the demand curve for pork. A quick Econ 101 lesson is in order.
Recall that the demand for a product is quantities of a product that consumers are willing and able to purchase at alternative prices. So, demand is an entire set of price-quantity pairs. Demand is not consumption, i.e. a quantity. It is a whole set of consumption levels that would result from different prices. Or conversely, a whole set of prices that result from different quantities. Lower prices go with higher quantities and higher prices go with lower quantities, so the line formed by the pairs slopes downward in a chart with price on the vertical axis and quantity on the horizontal.
A change of demand is a shift of the entire line. So, putting more product on the market doesn't change demand, it just shifts the industry along the demand curve and sellers realize lower prices. Conversely, restricting supply doesn't change demand, it just results in a slide up the demand curve and consumers pay higher prices. The only things that change demand are consumer income levels, prices of substitute and complement goods and consumer tastes and preferences.
RPCE measures the movement of the entire set of price-quantity pairs, i.e. the demand curves. It is computed simply as per capita consumption times the real (i.e. deflated) retail pork price. Per capita consumption is computed from production, exports and imports (thus the two-month delay), changes in inventories and population. The real pork price uses USDA's monthly estimate of retail prices and the consumer price index. There are admittedly some warts in these data (especially the retail price series) but they are consistent and public, so they provide a transparent measurement.
While RPCE provides a cardinal measure denominated in dollars, the important feature is how large that measure is relative to past years and months. It is easy to see that this year has been pretty crazy.
April and May saw huge reductions in RPCE because per capita consumption fell by 20.1% and 16.6% from one year ago, respectively, due to our inability to change pigs into pork in a substantial portion of our packing sector. Theoretically, retail prices should have increased sharply when quantity was restricted so dramatically but in the real world, things move more slowly. Retailers generally don't like to change prices by large amounts, and they resisted doing so for pork in April and May. Real retail prices were up only 2.5% and 4.1% in those two months meaning pork RPCE was down 18% and 13% in those months from year-ago levels. Year-to-date RPCE was down 5.4% at the end of May.
Dramatic improvements in packing plant operation rates put more product on the domestic market in June resulting in a sharp increase in per capita availability/consumption. June per capita consumption was up 14.7% from last year and 45.8% from May while real prices were 7.5% higher than one year ago. That resulted in a 14.7% year over year increase in RPCE. July changes weren't quite as dramatic but left RPCE 7.2% larger than last year and got the year-to-date figure back to just 0.6% lower than it was at the end of July 2019.
Why is minus-0.6% good news? Just think of the status of the foodservice sector at present. The loss of foodservice demand in April and May was one reason retail prices did not jump more in response to a massive reduction in the quantity of pork offered for sale. A shift of buying to retail took much of the June increase in product offering off the market at higher prices. Some recovery of foodservice operations has helped, but overall consumer level demand is nearly as good as one year ago even though much of the foodservice sector remains hamstrung. And that is true in spades for sit-down breakfast places and even fast-food breakfast businesses in a world with fewer commuters. Should either of those sectors recover significantly, the impact on pork demand would be positive.
But on the other hand — you knew it was coming, right? — there is that little factor of "income" as a shifter of demand. Admittedly, it is not a major factor for pork with most estimates of the income elasticity (a measure of sensitivity) of pork demand running in the range of 0.10, meaning a 1% change in income causes a 0.1% change in the quantity of pork demanded, all other factors held constant.
But multiplying a small number by a very large number can still give you a significant number and real gross domestic product, the aggregate income of U.S. consumers, fell by 31.7% from the first quarter of this year to the second quarter. It is likely that real GDP has rebounded some in the third quarter, but I (and many other economists) fear that the worst of it may still lie ahead for the U.S. economy. Even if coronavirus is controlled, there have been developments that will likely permanently impact total spending and thus total income.
Does anyone think that business travel with airfares, hotel bills and expense account meals will ever go back to what it was? How about companies with big offices to which thousands of workers commute every day? Do you think that persists after we have learned to work remotely and still get things done? What does fewer offices say about business real estate spending? Gasoline consumption? Car sales? Restaurant spending? Clothing sales? I have worn one pair of slacks since March 10 and will be sending my first dress shirt to the laundry since then this week! My poor cleaner. I really do feel bad for them.
But let's enjoy the good while it is here, and all do what we can to keep it going. High-quality hogs that are lean and free of defects give our packers and processors the best chance of delivering high-value products to consumers worldwide. Make sure that is what you are delivering. Our futures depend on it.
Source: Steve Meyer, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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