Market Preview : Of Trends and Such

by 5m Editor
15 March 2008, at 12:23pm

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

About three years ago, I noted in some presentations and articles that the long-term trend for cash hog prices appeared to have turned. In spite of the recent dip in prices, I still think that trend is true, so I thought it would be a good idea to revisit the forces that drive trends and how they might apply to our current situation.

Figure 1


Figure 1 shows weekly Iowa-Minnesota cash hog prices since 1973. The data do not represent the exact same price quotes for that entire period, since USDA has changed the way it reports prices on several occasions. Some adjustments were made to make the series fit together, but I believe they are reasonable adjustments and certainly do not change the long-run nature of the price trends shown.

Trends are one of three normal patterns impacting prices, the other two being seasonal and cyclical patterns. Trends are usually multi-year shifts in price levels, which when compared to the others, are more gradual in nature. Where business cycles and decisions drive cycles, and forces related to seasons (temperature, day length, precipitation, etc.) drive seasonal variation, far more basic forces drive trends.

Figure 2


The only three forces that can sustain a price trend are inflation, sustained changes in demand, and costs. Figure 1 shows all of three in one manner or another.

The rising prices of the late ’70s were driven by growth in meat demand and inflation. The lessening of inflation and downward pressure on meat demand caused the flattening of prices in the ’80s and early ’90s. The down trending prices of the late ’90s and early part of this decade were caused by adoption of new technologies that drove down the cost of raising hogs and processing them into pork.

Some would argue with the last point, perhaps saying that the real reason prices fell was packer consolidation, captive hog supplies and a number of other structural “ills” that conspired against hog producers. Those things can happen, but the net effect of such price declines in the absence of cost declines would be a reduction (perhaps a dramatic one) of hog numbers. We know that was not the case as hog numbers and pork production trended steadily upward, even during these years of downward trending prices. Only one thing can allow that result – falling industry costs.

Why has the trend changed?

Again, it’s a combination of the forces that drive trends. The first driver was the meat and pork demand improvement of 2004. Low-carb, high-protein, Atkins-type diets did a world of good for meat demand and got many Americans back in the habit of being carnivores – or at least the natural omnivores that we are!

But demand softened dramatically in 2006, driving prices lower and threatening the newly formed uptrend. The adoption of circovirus vaccines is the kind of technological advancement that usually means lower costs and a downtrend of prices. But I think it is clear that the increase in the prices of production inputs will offset the higher efficiency we have gained from these effective vaccines.

Higher grain prices are only part of the picture. Fuel, steel, cement, lumber – you name it – it’s higher today than just a couple of years ago. These price increases will moderate and perhaps reverse at some point, but the foreseeable future holds higher costs and, I think, a continuation of the up trend in hog prices. I believe it is very likely that we will see record-high prices in 2010 and beyond.

It doesn’t take a math wizard to see that higher costs and higher prices do not likely add up to any higher profits. Let’s just hope profits remain as good as they have been in the past.

Lest anyone be celebrating last week’s “relatively small” 4.9% year-over-year increase for federally inspected hog slaughter, realize that it is caused by last year’s March surge in slaughter – not a reduction in this year’s slaughter levels. As can be seen in Figure 1, the second week of March 2007 saw a big increase in slaughter, which was driven in part by storm-shortened slaughter runs the prior week.

It now appears that it was also the first evidence of the impact the circovirus vaccines would have. The vaccines were first available for commercial use during the fall of 2006. While not enough vaccine was available to meet demand, it did get used on several hundred thousand pigs (though sometimes at just half the recommended dosage). Those pigs, by all reports, grew much faster than non-vaccinates and reached slaughter earlier. That pulled pigs out of April slaughter and into March and showed up as a surge in March slaughter, then began “tailing off” in April and May. As more and more vaccine became available, slaughter runs began to grow during the summer and then exploded in September – a data commensurate with the full availability of circovirus vaccines in late June and July.

The moral to that story is that we are now comparing slaughter runs of vaccinated pigs to runs of “partially-vaccinated” pigs in 2007. The year-over-year percentages will be smaller, but the actual slaughter totals will still be record-large for the weeks in question.



5m Editor