Steve Meyer

Stocks are static relative to economic activity. Flows are moving between one economic activity and another. Differing rates of flow variables lead to stock variables and changes in stocks are necessary to support differing rates of flows. Your checking account is a good example of both.

Why the esoteric discussion of stocks and flows? Well, this week's meat market news demonstrates that the concepts are useful and inescapable.

USDA's monthly Cold Storage Report, released on Tuesday, indicated that Jan. 31 meat and poultry inventories were at their highest level since May 2003, and that chicken stocks are at record levels for the second straight month. A graph of meat and poultry in cold storage appears as Figure 1 and data from the February report is in Figure 2.

A quick look at the chicken data indicates that the flow variable having the most trouble is exports. There were over three times as many leg quarters in cold storage on Jan. 31 of this year as compared to last year. Drumstick and leg inventories were markedly larger as well.

Bird flu in Asia and Eastern Europe and widespread publicity about human cases have taken a toll on export demand and driven dark meat prices downward. With these large inventories and continued high output levels, don't expect these prices to recover soon. That means pressure on pork trimmings prices as de-boned dark meat is substituted into process meat items like hot dogs.

Equally concerning is that chicken breast inventories are still larger than one year ago in spite of very low breast meat prices.

And never overlook the largest category of chicken inventories -- "other." Those stocks are up 47% from last January and they include processed chicken products that are quite popular in both retail and foodservice outlets in the U.S.

While available stocks of chicken are large relative to one year ago, the flow variable of production marches merrily onward. Broiler slaughter for the week ending Feb. 11 was 6.5% larger than last year and birds were 2.3% heavier -- leaving chicken production 8.9% larger. Egg sets have exhibited some year-over-year declines in recent weeks, but it doesn't appear that the chicken companies have reacted to recent poor financial performance by reducing output. I would think they could afford to protect market share for only so long.

Pork Follows Suit

The U.S. pork sector has some stock variable problems of its own! Total pork in cold storage was 6% larger than one year ago and 23% larger than on Dec. 31. Inventories of hams, loins and trimmings were significantly higher. The ham number is not a big concern as last year's ham inventories were somewhat low due to active exports to Mexico. The loin and trimmings numbers are probably a direct reflection of very competitively priced chicken breasts and dark meat.

Remember, however, that this stock variable (freezer inventories) was measured on Jan. 31, after the flow variable of pork production had been surprisingly large for the entire month. Last week, federally inspected hog slaughter was 4.6% lower than one year ago. Higher weights left production down only 3.6%, but it marks the first year-over-year reduction in a non-holiday week this year.

With the way holidays fell, it is hard to tell if we had some unusual happenings in January. The slaughter runs of last week, and this week through Thursday, are supporting rumors of some tax-related marketing delays in December. Producers clearly had a good year in 2005 and they apparently believe that 2006 will not be as good. There was a big incentive to shift income for those on a cash accounting system. Thus, it appears that the flow variable, "production," was slowed in December and speeded up in January.

I'm not surprised that the flow variables "consumption" and "exports" did not keep pace and, therefore, the stock variable, "frozen inventories," grew last month. The good news is that production has turned decidedly negative the past two weeks, supporting prices and likely drawing down frozen stocks. I expect slaughter to stay below two million head until late summer, so the worst of the supply challenges should be behind us.

Canadian Pig Crop Smaller

Canada's breeding herd numbers posted its first year-over-year decline in nearly 10 years. Statistics Canada's January Hog Statistics report pegged the herd at 11.644 million head, 0.2% smaller than on Jan. 1, 2005. The reduction leaves the Canada-U.S. breeding herd 0.4% larger than one year ago.

The most compelling data in the Canadian report, though, are those for farrowings, farrowing intentions and the pig crop. Farrowings fell short of year-ago levels for the third straight quarter in October-December, and farrowing intentions for January-March are 4.0% smaller than last year. The Canadian pig crop was smaller than one year earlier for the fourth straight quarter and the October-December decline was huge at 4.3%. That figure agrees reasonably well with the inventory of lightweight pigs (-4.8%).

It appears safe to say that Canada will not be a source of higher pig and pork production this year. The exchange rate changed the competitive position of Canadian producers versus their U.S. counterparts and now higher feed prices, due to the duty on U.S. corn, will certainly discourage expansion.

Source: Paragon Economics - 23rd March 2006