CME: How Long Before US Sees Price Decline?
US - CME's Daily Livestock Report for 20th November 2008.As energy, grain and other commodity prices decline
from the spectacularly high levels established last summer,
a question has been percolating in the popular press - how
long before US consumers see a significant decline in meat
prices?
It’s a reasonable question considering that crude oil prices
are at $50 per barrel from almost $150 last summer and the price of
corn, the main feedstock for US livestock and poultry producers, is
down to $3.50 a bushel from near $8 last summer. But it is also a
question that does not account for the full dynamics in the food
market.
The reality of the matter is that it takes significantly
longer for high raw material costs in the meat sector to translate in
higher consumer prices than it does in many other industries.
There are years between the time a calf is just a sparkle in some
bull’s eye in the fields of Texas and the time a US consumer picks
up a steak or some ground beef at the local supermarket. In some
cases, such as with chicken, the industry was able to keep in check
prices for items such as chicken breasts in order to keep market
share and because some of the loses were offset by better returns in
export markets.
But even more importantly, we propose that a good portion
of the significant increase in food raw material costs (be this higher
grain or meat prices) was absorbed by the various players in the
supply chain and US consumers had actually seen a very small part
of the increase. It is simply too difficult for food retailers and foodservice
establishments to drastically change prices on the shelves or
menus. Often they pushed back and some the rise in raw material
costs was absorbed by suppliers in the form of tighter margins.
When cereal producers were faced with sharply higher wheat and
corn prices last spring, they responded by reducing the pack size
rather than actual prices for consumers (CPI numbers look at price
per unit of serving, however). The chart is an update of
the version we presented last year at around this time. It shows
that while gasoline prices have risen sharply since January 2004, a
result of the easy pass-through of costs in that industry, beef, pork
and poultry price appreciation has actually been much more muted
and very close to the overall headline inflation for this period. Will
meat raw material prices ease going forward? The answer is yes.
Will consumers see lower meat prices? Unlikely, given that they
did not see a significant portion of the increase.
