Meat Market Volatile, But Don't Panic

I'm not sure you could pile more negative news on the meat markets if you tried, but it appears some people are giving it a shot!

Let's review:

  • The third case of bovine spongiform encephalopathy (BSE) in the United States was confirmed on Monday when a cow from Alabama tested positive. The case has provided new fuel for a few animal-rights-leaning congressmen to once again move to remove all downer animals from the food supply regardless of the reason for the animals' conditions. There hasn't been a lot of backlash from export markets, but it certainly can't help the situation with Japan and Korea.

  • Hong Kong slapped a prohibition on beef exports from Swift Beef when it found bones in a shipment of product. Hong Kong had been allowing only boneless product from animals less than 30 months old. Japan announced that it would take a long look at this infraction since it was similar to the veal shipment back in January that prompted Japan to reimpose a prohibition on all imports of U.S. beef. Hong Kong's company-specific action seems more reasonable to me, but we have to remember that there is much more than a food safety concern behind the move by the Japanese.

  • Bird flu continued to spread on the other side of the globe. Two suspected cases turned up in Israel today, and European officials have confirmed the virus in a cat.

  • Fed cattle prices and beef cutout values continue to decline at a record pace for this time of year. Figure 1 shows western Kansas slaughter cattle prices. The $8.12 decline this year is the largest in my data set that dates back to 1980. The second largest decline from Week 1 through Week 13 of the year occurred in 1986 when prices fell by $5.82. This year's decline is 40% larger. The fall in cutout values has not been so dramatic, but this year's $7 decline is far different that the average $8 increases over the 2000-2004 period.

  • Broiler egg sets have rebounded from two smaller-than-last-year weeks at the beginning of February to post an average year-over-year increase of 1.3% over the past three weeks. This comes in the face of boneless/skinless breasts selling at $1.03/lb., leg quarters quoted at $0.20/lb. (though USDA cites bulk prices of 15-16 cents -- barely above rendering value), and wings well under $0.90/lb. USA Today cited stock prices at Sanderson Farms, Gold Kist and Pilgrim's Pride that are all over 40% lower than their high of the last year. Even the stock of industry leader Tyson Foods is over 30% lower than its one-year high.

  • And, then, the rally in cash hogs has run out of steam (see the red line in Figure 2) and Chicago Mercantile Exchange (CME) Lean Hogs futures took a big hit on Tuesday with most contracts limit down.

Historical Trends
What should you do? Don't panic. Take some advice from Harry Truman: "Study your history."

Figure 2 is a very busy graph, but look at the individual annual lines of hog prices. Notice that this year's price action, though a bit volatile, is certainly within the historical price movements for this time of year. More importantly, look at the lines from the past 10 years from this point (the vertical black line) until the middle of May. All of them increase except one -- the 2002 line, which is when the Russian chicken embargo caused chicken prices to implode and took pork and hog prices down with them.

That upward pattern was so consistent in these 10 years that I went back further to see what hog prices have done between March 11 and May 15. The results appear in Figure 3. Note that since 1972, 23 years have shown higher prices during that period, 10 have shown lower prices. All but one of the 10 price-decline years was before 1995. That one, of course, was 2002.

Further, I would argue that last year's barely-positive figure of $0.40/cwt. was itself an anomaly because the mid-March price was influenced by the extraordinary hog market of December 2004. Had December been lower and, thus, March been lower, the increase into May would have been larger.

My experience is that when negative piles on negative, markets are frequently poised to turn. We certainly have piles of negatives at the moment and we shouldn't just overlook them. But history tells us that there are powerful forces that usually drive cash hog prices up over the next 7-9 weeks.

Make some prudent decisions now if your balance sheet and borrowing position dictate such. If, however, you have a strong equity position (as many, many producers have at present) and can stand a bit of risk, it may pay to watch for a cash rally. CME Lean Hogs futures out to the end of 2006 could be positively impacted if that rally develops. History suggests that summer and fall futures, on average, peak in late April to early May.

Click to view graphs.

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