I usually don’t spend much time discussing the Production and Price Summary tables that appear at the end of each Market Preview column. Normally, I don’t see the need because I know our readers are very capable of reading and comprehending the data. However, this week’s Competing Meats table is both interesting and, I think, enlightening in regards to what is going on in the meat and poultry business.
Note that U.S. federally-inspected cattle slaughter last week was 630,000 head, 5.9% lower than one year ago. That marks the third week this year in which U.S. cattle slaughter has been lower than one year ago, in spite of cow slaughter being higher. Implication: Sharply lower steer and heifer slaughter.
With weights very near year-ago levels, this reduction in slaughter means that beef supplies are tightening in the United States and the price impacts are dramatic. Fed cattle, though a bit lower than one week ago, are near a record high. Last week’s Choice cutout value of $172.52 is the fourth highest on record, leaving only one observation in 2008 and two in 2003’s post-Canadian-BSE market ($188 and $192) between today’s market and a new record high.
Even chicken production has fallen below year-ago levels in recent weeks. Last week’s total of 859 million pounds was 7.5% lower than one year ago. Year-to-date (YTD) production is down only 1.4%, and I believe this number is more indicative of the magnitude of the slowdown in chicken production growth. Still, any negative number is a big change from the expansion that was underway last fall.
Unlike the beef industry, chicken reductions have yet to result in higher prices, with all three primary cuts lower than one year ago. One reason is the amount of frozen chicken in storage on Dec. 31 – 9% more than at the end of November and 25% more than last year.
I think this is confirmation that supplies of competing meats – especially beef – will be positive for pork and hog prices this year. U.S. feedlot placements are larger than one year ago, but the placements last year were very low and this year’s placements have been forced higher by poor winter wheat grazing conditions. Cattle slaughter at the end of the year dipped deeply into available supplies. Meat demand, by any measure, appears strong even though the economy is still limping along, especially from the employment point of view.
Are $95-$100/cwt., carcass, hogs truly in the offing? Not according to projected supplies and a demand level constant with last year. But that last condition appears shaky. The futures market is still trading much higher demand for this spring and summer and I would certainly not rule out the possibility that it could occur – especially if beef and chicken prices provide the kind of support that today’s conditions suggest.
With production costs where they are, these positive price developments will not translate into handsome profits, but they have moved my 2011 profit projections to the positive side of the ledger by about $5/head. That is based on futures prices as of Friday, Jan. 21. Not great, but a lot better than it could be with $6.60 corn and $380 soybean meal futures.
Weekly Negotiated Hog Market Approaching 5%
The ever-thinning negotiated hog market is again a topic of discussion in the pork industry. Figure 1 shows the weekly percentages of all hogs that are priced using the various methods reported by USDA. The downtrend of negotiated hogs is obvious with the week of Dec. 24, 2010, setting an all-time low of 2.7%. The average weekly figure for 2010 was 5.2%.
This decline does not mean that prices are being manipulated, that the price discovery process is not working, that there is some grand conspiracy by packers, integrators, or anyone else, or that the world is going south in a hand basket. It does mean that there could be problems depending on how you define the problem.
Ted Schroeder shared some information recently that I find helpful in thinking about this declining size of the daily or weekly negotiated hog market. The information actually comes from a 1980 paper by noted agricultural economist William Tomek of Cornell University and it relates to a mathematical theorem by a Russian named Chebychev.
The gist of Dr. Schroeder’s comments is that no “true” or “competitive” price is ever discovered with absolute certainty. There is always some uncertainty due to varying degrees of information, negotiating abilities, market/financial position, etc. Chebychev/Tomek/Schroeder point out that the “probability” of a given negotiated price being within a specified range of the “true” price:
•Declines as the variance of prices increases;
•Declines as the number of transactions decreases; and
•Declines as the “comfort range” (my choice of words) for the price decreases.
So, if the variance of prices is constant, the probability of a negotiated price being within, say, $0.50/cwt. (i.e. the comfort range is constant at $1.00/cwt.) of the “true” price in a competitive market falls as the number of transactions falls. Or, conversely, the probability of the discovered price being outside the comfort range increases as the number of transactions falls, all else held constant.
I still believe that the drop in the number of hogs for which prices are negotiated is primarily the result of market forces. Fewer and fewer producers and packers (it is a two-way street) want to invest their time in dickering. One result is that the chances have risen that an agreed-upon price is unrepresentative of actual market conditions on a given day. Is the collective cost of that error less than the collective cost of negotiating more hogs? And who bears the relative costs? Individuals must bear the costs of negotiating while everyone bears the costs of errors, which may, in fact, be low.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]