Meat Inventories Must Be Trimmed

The very first rule for getting yourself out of a hole is stop digging!

Granted, it's not easy to rein in livestock production, but the past few weeks have seen an acceleration of hole-digging in terms of meat and livestock prices. And, I fear, it may get worse before it gets better.

For most of 2005, we lamented the sad state of meat demand and didn't have much of an explanation other than the cessation of the high-protein diet trend. It's hard to get a handle on meat demand thus far in 2006, and the biggest reason is that we are dealing with huge supplies of all meats. Figures 1 and 2 and the weekly data tables tell the sad tale.

Total pork and beef production (Figure 1) was nearly 7% higher last week than for the same week last year and now stands 2.9% higher for 2006. The first two, 2-million head hog slaughter weeks ever in March are just behind us and this week is going to be very close to breaking the 2-million barrier as well. The inexorable climb in carcass weights adds another short 1% to total production.

And if you think hogs are problem, look at the cattle and beef situation. Last week's Federally inspected (FI) cattle slaughter was over 5% larger than last year and their weights are over 3% larger. U.S. FI beef production was over 9% larger than last year.

Each of the last three weeks has seen beef and pork production 5% or more higher than last year. Seven of the 11 weeks this year have seen that figure at 3% or more. In fact, the only weeks even close to last year were Week 1 (New Year's Day is in that week this year where it was not last year) and the two weeks that beef packers forced production lower by simply refusing to kill cattle at a loss. Those decisions have now backed up cattle and put us in an over-supply situation for the foreseeable future. And, remember, feedlots have some responsibility, too. They could have accepted lower prices and kept cattle moving during those weeks!

Market analysts' estimates for Friday's Cattle On-Feed Report indicate that they expect March 1 inventories to be 7.5% larger than last year. Those numbers are inflated by cattle that have been moved from poor pastures (especially wheat) in the southern plains. This early movement will be offset to some degree in the next two months, but these inventories are record large and spell plenty of beef through late summer.

The Chicken Standoff
Then there is chicken. Prices are 20 to 30% lower than one year ago and production 5% higher. While that's not larger than the red meat guys, it does come from a sector that has much more control over output in the short run. Yet egg sets for the week ending March 4 were still 1.4% higher than last year.

Last week, USA Today discussed the recent dismal performance of chicken company stocks, noting that the stock prices of all the major players (Pilgrim's Pride, Sanderson, Gold Kist, Tyson) were well below their 52-week highs. These companies are very market share focused. No one wants to be the only company to reduce output and thus the standoff continues.

Round 'em up, Move 'em Out
The moral to the story -- profits beget production. While these levels of output were not predicted from some of the previous inventory data, we should not be surprised. Cow-calf operators have seen record profits. Pork producers have seen a long string of profitable months. Chicken producers saw record prices and profits just one year ago. Even cattle feeders made big money in 2003 and have seen on-and-off profits on some cattle (depending largely on how they got the feeders bought) since then. Add in Omaha corn at $1.82 (4% lower than last year) and Central Illinois meal at $173 (11% lower than last year) and we should not be that shocked.

What to do? First, get these critters to town! That won't help prices in the short run, but we need everything to get more current; 783-lb. beef carcasses, 203-lb. pork carcasses and 5.3-lb. dressed chickens are a big part of the problem.

We cannot feed our way to profitability! While seasonal meat demand strength will help improve prices, it will not likely overcome this kind of supply bulge. This medicine is bitter, but it must be taken.

Second, continue to watch futures markets for pricing opportunities. There is certainly a chance that the most negative impacts of these supplies will be this spring -- if we work through them and stop digging! Failing to do so, this weakness will continue to be pushed to summer and fall contracts that, by the way, are still offering profits for average or better pork producers.

If you are not comfortable with futures markets, talk to your packers about cash contracts. The caveat there is to watch the basis level closely. Packers will not take the risk of a cash contract, but they will sell futures contracts to cover their long position in hogs. That means they will face basis risk and they will include a large enough basis in the price quoted to you to cover that risk. That may mean the largest observed basis over the past 10 years or so. You can see historic Iowa basis levels at Dr. John Lawrence's ISU website: (

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.