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Market Preview: Pork Demand Remains Solid

by 5m Editor
26 July 2011, at 10:10am

US - In this week's "Market Preview" from National Hog Farmer magazine, Steve Meyer writes about pork demand.

Consumer-level pork demand remained strong in May, leaving pork’s demand index higher than the indexes for beef or chicken when compared to year-ago levels (Figure 1). The last observation for each index is for June 2010 through May 2011 vs. the same period one year earlier. All other observations are for calendar years.

Pork demand is 4.5 per cent higher than one year ago, primarily due to significantly higher retail pork prices. The index for the month of May (as opposed to the 12 months ending with May) was 6.7 per cent higher than that of May 2010, extending the string of higher year-on-year demand indexes to nine months.

The average retail price of pork in May, according to USDA’s Economic Research Service, was a record $3.484/lb. Deflating that price to 1982-84 dollars, the average "real" price of pork was $1.542/lb., 10.55 per cent higher than in May 2010. Note that the base year for deflating prices is not important. One could base the prices in any year using a price index (I use the Consumer Price Index for all items here) and still come up with the same year-on-year percentage change – and that (10.55 per cent) is the important number for these calculations.

With 10.55 per cent higher prices, one would expect per capita consumption to fall by 7.9 per cent, based on an assumed elasticity of demand of -0.75. Per capita consumption actually fell only 1.74 per cent in May vs. one year earlier. US consumers did not reduce the quantity of pork they purchased by as much as would have been expected with a steady demand curve. Therefore, demand was higher in May 2011 vs. 2010, and the calculation tells us that the shift amounted to 6.7 per cent.

The same calculation using the average percentage change in price and quantity for the past 12 months gives us the 4.5 per cent increase in demand for the June ’10 through May ’11 period.

It should be noted that, even though their trailing 12-month indexes remain positive, the indexes for both beef and chicken were lower than one year ago in May. The index for chicken was 1.3 per cent lower while the beef index was down 3.9 per cent. These drops coincide closely with the cooling of the economic recovery and a drop of the National Restaurant Association’s Restaurant Performance Index to a value below 100 for the first time since November. Those all make sense since beef and chicken demand both depend more heavily upon restaurant sales.

Big Birds Add to Chicken Inventories

Friday’s Cold Storage report from USDA indicates that frozen pork inventories of 496.6 million pounds, 20.3 per cent more than one year ago, were still ample on 30 June. But pork stocks were lowered by nearly 10 per cent during the month – a faster pace than the 6.3 per cent average drawdown for June over the past 10 years. Only ham and "unclassified" inventories grew during the month, while stocks of ribs (-45 per cent), butts (-26 per cent), bellies (-18 per cent) and loins (-10 per cent) were markedly reduced. As Figure 2 shows, frozen pork stocks are near the mid-point of their historic range – not a reason to expect price strength, but neither a reason for any big concern.

The spot for concern remains chicken inventories, in general, and breast meat inventories in particular. Total chicken stocks were 13 per cent higher than one year ago on 30 June. Breast meat stocks remain 47 per cent higher than last year and were unchanged during June. Wing stocks are nearly double their 30 June 2010 level and grew by 6 per cent during June. Leg quarter stocks did decline during June, but they remain 14 per cent larger than one year ago.

These stocks and concurrent low prices for breasts and wings are finally driving action on the part of chicken producers. Egg sets have averaged 3.5 per cent lower since dropping below year ago levels the first week in May. Chick placements have averaged 3.4 per cent lower since dropping below year ago levels the first week of June.

Those reductions have yet to be realized at broiler processing plants but should be seen soon. Broiler slaughter is down only fractionally since May and production remains higher (+2 per cent the week of 17 July) due to higher average slaughter weights.

Year-on-year slaughter reductions are imminent, but production may only drop back to year-ago levels if the mix remains tilted toward big birds headed for boning. The glut of breast meat and very low breast meat prices should tell broiler companies that they are raising too many of these larger birds, although the message does not appear to be getting through – yet!

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