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Searching for the Positives

I am an optimistic person. I always try to find the good in situations, but I can find hardly any in the meat business this past week. To paraphrase a market-analyst friend in his daily letter of Thursday: "What a disgusting week."

February Chicago Mercantile Exchange (CME) Lean Hogs futures made a new contract life low on Thursday. April futures are now $10 below their contract life highs reached back in December. Even the summer contracts, which had withstood the brunt of this sell-off, have now lost $5-$6 from their highs in early January -- just one month ago.

The cutout values, Iowa-Minnesota and Western Corn Belt prices, all fell by about $1.50 on Thursday. Eastern Corn Belt prices were down fractionally to keep the national prices just $1 lower on the day, but this has turned into an ugly situation in the pork business. And the other meats are right there with us.

CME Live Cattle and Feeder Cattle futures had a tough month and cash chicken prices, though they have rebounded somewhat, are still as low as anyone can remember. Northeast boneless/skinless breasts were quoted at $1.15 yesterday, but much of the trade would be for lower prices. Leg quarters are still quoted at only $0.23.

Demand Slippage Applies Pressure
What's going on here? It's supply and demand. (What did you expect from an economist?)

Supply has definitely been an issue. See Figures 1-3 for an update. Year-to-date figures are a bit misleading for all three species because the first week of 2006 contained the New Year's holiday observance where it did not in 2005. So, leaving out that week and looking at only the past three weeks is a better measure of the current supply situation -- and it is not encouraging for prices.

Federally inspected pork production for the three weeks ending Jan. 28 is 4.4% larger than one year ago. Beef production is up 4.4%, while broiler production is 5.4% higher for the same time period. While beef and pork inventories came into January in reasonably good shape, stocks of frozen chicken were huge. It all has to go somewhere at some price.

These kinds of supplies would pressure prices even if demand were good -- and demand conditions are far from good. Professor Glenn Grimes' computations of demand indexes for all of 2005 show pork demand down 4.2% and beef demand down 3% for the year. Chicken demand still appears higher (by 2.4%) because low wholesale chicken prices have not yet affected retail prices. Turkey demand was down 5.3%.

Further, it appears that the demand slowdown is at the retail level. The hardest hit pork cuts have been loins and butts -- cuts that are generally sold to retailers, not processors. Darden Restaurants reported a significant increase in same store sales last year while things are good enough at Burger King that the owners are moving ahead with an IPO as early as March. I really thought that high fuel and heating costs would affect foodservice demand first, but the evidence does not support that thinking thus far.

Finally, there were two major announcements this week of cutbacks at big food companies. Kraft will cut 8,000 jobs and close 20 plants, worldwide. How much of this change will fall on Kraft's Oscar Mayer operations is not known, but Kraft has been shopping Oscar (albeit at a high price-earnings multiple) for some time.

In addition, Conagra announced Thursday that it would sell most of its Refrigerated Meats Group. The Butterball, Armour and Ekrich lines are included and the price is expected to be about $1.9 billion. It sold Cook's meats (mainly hams) last week to Smithfield and will retain only its Hebrew National, Healthy Choice, Slim Jim and Pemmican product lines.

Change is certain, but let's hope some changes become positive soon.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]