For instance, the price of 72CL pork trim was quoted by USDA at almost $140/cwt on Tuesday, a 170 per cent increase over year ago levels. Ground beef, beef rounds and other beef products also have shown significant spikes in value in the last three months. What accounts for such moves in price?

Red meat supplies are down but not enough to justify such prices. Weekly hog slaughter in March was down 6.8 per cent but the heavier hog carcass weights offset almost half of that decline. According to USDA, weekly pork production for the five weeks ending 5 April was down only 3.3 per cent from a year ago. Fed cattle slaughter was lower in February but March and early April slaughter has been about 3.6 per cent below year ago levels.

Simply looking at slaughter numbers and weekly beef and pork output will not explain why prices for some items have more than doubled vs. last year. The issue of stockpiling has been discussed. Fearing a shortage of supplies in the spring and summer, market participants sought to build inventories in a hurry. The stockpiling theory gets some credence given the practice of processors in pricing product for delivery in the current month by using prices in the previous month.

Over the course of the year the pricing evens out but in times of expected shortages and big price increases, some end users may have sought to accelerate purchases that will be priced off a lower base. This probably does help explain some of the more dramatic moves we have seen. The price of 50CL beef trimmings, a key benchmark for fat trim values, jumped to as high as $163/cwt in late March, a $40 premium to the highest price ever paid for this item, only to drop to $115/cwt a couple of weeks later. Panic buying can produce crazy results.

But there is more we think to the dynamic in the market and it has to do with the shift towards booking an increasing share of sales on a formula basis. Formula buying is good for buyers as they don’t need to spend all their day hitting the phones and trying to bid on product. It is good for packers as they don’t need as big of a sales staff in order to clear the market.

However, as volumes in the spot market decline, price discovery becomes increasingly difficult and prone to breakdown. It is a point that Steve Meyer discussed at length in a 2013 presentation (link here). Formula buying also appears to have added to market volatility, with much bigger price spikes than in the past. Because of Mandatory Price Reporting, we now have visibility of beef trades for a few years while in the case of pork, data on formulated sales only became available in late 2013 (see charts).

The data shows that the supply of beef and pork available in the spot negotiated market has been drifting lower while formula sales are either steady (beef) or higher (pork). Looking at the pork data, the supply of pork in the spot negotiated market in March was down some 30 per cent compared to a year ago while the supply sold through formulated sales was up 19 per cent. So when you see spikes in price of 50 per cent, 60 per cent or 170 per cent, it is not because the total supply of pork is down 20- 30 per cent (to get those price flexibilities), it is because the supply available to those bidding on spot supplies became extremely thin.

As slaughter numbers declined in Q1, packers had to fill standing formula orders and less product was available in the spot market. Regular spot buyers had to bid on a much smaller supply and paid record premiums to get the supply needed to run production. The risk here is that the price signals to the consumers are for dramatic supply shortages and the unintended consequence is that quantity demanded may fall much more than current supply conditions warrant— hence the risk of extreme price volatility.