Ron Plain

It seems that the more hogs packers slaughter, the higher price they are willing to pay. Were we economists wrong all those years when we said that an increase in supply would yield lower prices?

During the first half of 2004, hog slaughter was up by 3.86% compared to the first six months of 2003. The average spot market hog price during January-June 2004 was up by $14.60/cwt (28.4%) compared to 12 months earlier.

During July and August of this year hog slaughter was up by 3.91% and the average price paid was up by $18.99/cwt (33.5%) compared to the same months of 2003.

Since August 28, hog slaughter has been 4.9% above year-earlier levels. During this 17 day period we had 3 Sundays, 2 Saturdays, and Labor Day. Of the remaining 11 days, we had 4 days when USDA pegged hog slaughter at 400,000/day, on 3 days packers killed 399,000 hogs per day, and on 2 days they slaughtered 398,000 head. These 9 days all rank among the 21 largest daily hog slaughter totals of all time. Given this huge supply of hogs, one would expect a sharp drop in prices, but that hasn't occurred. The average spot market price paid by packers on Friday August 27 was $70.27/cwt. The average spot market price paid yesterday was $2.24 higher at $72.51/cwt. More hogs and a higher price.

The explanation for this apparent paradox is that demand has increased. Market analysts have widely attributed the phenomenal demand for meat in recent months to the popularity of low carb/high protein diets such as the Atkins Diet. Although the Atkins Diet is a reasonable explanation, it leaves market analysts wondering when this demand boost will fade. After all, diets are notoriously faddish and short lived.

As the slaughter and price data mentioned above indicate, the end to the growth in pork demand does not appear to be at hand.

Historically, economists have always focused on supply when trying to predict hog prices. If one had known exactly how many pigs were born in the U.S. each day during the past year, he would still have under estimated 2004 hog slaughter by 2% due to increased hog and pig imports from Canada. If one had known exactly how many hogs would be slaughtered each day this year, he would still have under estimated 2004 hog prices by 50% due to increased demand.

Next week, the industry will focus a lot of attention on USDA's September Hogs and Pigs Report. I'm sure that this report, like most of these inventory surveys will be within 2% or so of the actual number of hogs in the country. I'm not sure that this will help very much in predicting hog prices during the coming year. What we really need is a leading indicator of demand change. But, who or how do you survey for that?