Market Preview: Meat Demand is Risky Business

I remain very concerned about meat demand, in general. I have believed for some time that this is far and away the largest risk factor for the US pork industry in 2009. So far, I have seen nothing that would change my mind.

The current data is rather mixed. This week’s production and price tables suggest that demand is indeed soft – especially for beef and chicken. Note the shaded cells in this week’s table (please see bottom of this page). The year-on-year percentage changes in slaughter and production are almost all negative. Lower output and constant demand would suggest that prices should be higher. But the vast majority of product prices are actually lower than last year. Lower output and lower wholesale prices can only mean lower wholesale meat demand.

Does that mean retail demand and hog demand are lower? No. These relationships do not always change at the same time and the hog slaughter (down from last year) and hog price (up from last year) suggest a roughly stable hog demand. Professor Glenn Grimes at the University of Missouri reports that retail pork demand was actually higher for the period from November through January, the most recent three months for which we have all of the necessary data. Preliminary calculations indicate that the year-on-year change for December through February will be positive as well. February cold storage stocks will not be available until this afternoon.

But wholesale markets are very important. Checkoff-funded research conducted in 2000 by Kansas State University indicated that the wholesale market was the primary point of price discovery for pork and hog prices. One reason is that all of the players – packers, retailers, foodservice operators, and exporters – are involved in that market and all of them bring information, needs, knowledge, etc. to the table. This is not to say that producers aren’t “players,” but producers take part in the wholesale market only through packers and both are only involved on the supply side of this process in the short run.

Exports a Bright Spot

We did get one piece of positive information this week when the Department of Commerce and USDA released January export data. Product-weight pork exports were 4 per cent lower than in January 2008, but were 2 per cent higher in total value at $295.8 million. Quantity is important, but value is what pays the bills, so this increase is very important.

Exports to Japan increased 18 per cent vs. last year, while shipments to Mexico were up 65 per cent from last year. The latter was inflated a bit by the fact that January 2008 was at the tail end of a period of very soft shipments to Mexico. Still, the size of January shipments was surprising given the near-50 per cent devaluation of the peso since 1 October 2008.

Shipments to Canada (-9 per cent) and Korea (-8 per cent) were marginally lower, while those to China/Hong Kong and Russia were sharply lower at -66 per cent and -70 per cent, respectively. A chart of carcass-weight equivalent exports, by destination, appears in Figure 1.

I have also included an updated version of the monthly pork export graph I used in the 5 March edition of North American Preview. Note that the January observation, though lower than one year ago, is above the 2004-2007 trend line. As I noted in the 5 March edition: If 2009 exports can stay near that longer-term trend, I think it will be a victory in spite of the fact that 2009 exports will be about 15 per cent lower than last year.

Be Ready for a Rally

Finally, Chicago Mercantile Exchange Lean Hogs (LH) futures are endorsing the idea of a spring rally. Every contract has gained $4 to $6 from the spike lows of 24 February, and has stayed consistently above the 10-day moving average. In addition, every contract for the remainder of 2009 has penetrated the 50-day moving average and every contract from June onward has closed above the 50-day moving average – normally a strong confirmation of a trend change.

Based on Iowa State University’s Estimated Costs and Returns parameters, this week’s corn and soybean meal futures prices put breakeven costs for the rest of 2009 in the $66 to $69/cwt., carcass, weight range. LH futures are offering profits from May through August at those cost levels, with October and December getting closer.

Selling into a rally is hardly ever a bad idea, especially if the prices are profitable. But, I still wouldn’t get in a hurry. Historical seasonal patterns suggest that this rally will continue into late April or early May. But be ready to pull the trigger when your return-on-investment goals are met or when the charts indicate that the rally has run out of steam.