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CME: Meat Price Inflation Outpacing Food Price Inflation

21 September 2012, at 1:12pm

US - The Bureau of Labor Statistics recently published the results of its August price surveys, offering the latest reading on prices at both the producer (PPI) and consumer level (CPI), write Steve Meyer and Len Steiner.

At the retail level, the data shows that food price inflation continues to outpace overall inflation in the economy. Meat price inflation, also is outpacing the overall inflation in food prices. The trend, however, has been for food prices to grow at a slower pace than earlier in the year. Some items, such as lamb and pork, actually have seen a dramatic decline both in terms of wholesale prices and prices at the retail level. The Consumer Price Data (CPI) shows that while overall price inflation in the US in August was hovering around 1.7%, food price inflation was at 2% (compared to 4.7% in Q4 of 2011). Food inflation at retail has slowed down considerably and it was pegged at 1.47% in August while food inflation at foodservice continues to run at around 2.8%, about the same as earlier this year. Price inflation for a number of protein items continues to be quite strong. Beef and veal prices at the retail level rose by 5.8% in August, while prices for chicken and chicken parts were up 5.9%. Turkey prices were up 7.2%. In contrast, prices for pork at retail were 0.1% lower than a year ago while lamb prices were down 4.4% from a year ago.

As we have noted in the past, there are lags in the transmission of higher (or lower) livestock prices to the consumer. The charts to the right show the year over year change in prices for beef and pork both at the wholesale and retail level. For wholesale prices, we used the Producer Price Index for pork and beef while for retail prices we used the Consumer Price Index for these two species. As you can see, the swings in the pork market are much more dramatic given the more pronounced cyclical performance of hog prices. Pork producers are much more responsive to changes in profitability than beef producers given the relatively shorter production span (12-18 months for hogs vs. multiple years for cattle). Generally the decline in wholesale pork prices is followed by a decline in retail prices as well, although the response is not immediate given the propensity of retail meat prices to be sticky.

Also, the magnitude of the decline (or increase) in pork prices is not as large as at the wholesale levels since at the retail level the price of the raw material makes up a smaller share of the sticker price. The recent break in pork prices needs to be placed in the context of other such occurrences in recent years. Normally the break in wholesale prices is followed by a sharp reversal and significantly higher prices in the following year. Producers respond to negative margins by cutting back production. In 2009, pork prices at the wholesale level fell by as much as 23% only to bounce back 30% the following year. We will likely see further declines in the pork PPI in the final quarter of 2012 but the expectation is for a sharp rebound next year and possibly the following year as well.