Market Preview: Lesson in Pork Sales and Margins

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 29 December 2009
clock icon 6 minute read

The average retail pork price took a hit in November, according to USDA. The November price of $2.818/lb. (retail) was $0.062/lb. (2.2 per cent) lower than in October and $0.185/lb. (6.2 per cent) lower than one year earlier. See Figure 1. When combined with lower estimated domestic pork consumption in November, it appears that consumer-level pork demand was perhaps the softest we have seen for an entire month in 2009.

That statement leaves room for the domestic demand impacts of H1N1 in late April and early May. That episode was, for the most part, a short-lived situation and the fact that it was spread over parts of two months diminished its impact in these monthly data. National Pork Board research indicates that domestic demand rebounded rather quickly for most market sectors. An exception has been Hispanic markets where the safety of pork is still not trusted by some consumers.

It should be noted that retail prices have fallen by 8.8 cents/lb. (4 per cent) since September, while hog and wholesale values have risen steadily. The result has been a 6 per cent decline in the estimated farm-to-retail marketing margin (or price spread) since September. Farm and farm-wholesale (i.e. packer/processor) shares have risen during this time period.

An important point to keep in mind about the prices at the various levels of the marketing chain is that there are significant time lags involved in price transmission. The lower retail prices in October and November are largely the result of lower wholesale prices in August and September. Retailers, and to an even greater degree foodservice operators, plan well into the future and often buy product well ahead of the anticipated time of need, especially when running features. Lower costs in August and September allowed retail prices to fall in October and November. I think we will see higher retail prices for December and beyond because the cost of product is now rising for retailers and foodservice operators.

A Closer Look at the Marketing Chain

One reason I am highlighting retail prices is that we are going to hear a lot of talk about “price spreads” or “marketing margins” in the next year. The topic will be the focus of the last of the USDA/DOJ (Department of Justice) competition workshops next December, so it would help us all to get more familiar with the concept.

Figure 2 shows the value, on a retail weight basis, received by each level of the marketing chain. We have labeled the farm-wholesale spread as “Packers’ Share” and the wholesale-retail spread as “Retailers’ Share.” A few key points should be considered.

First, these spreads are not profits. The Producers’ Share represents total income to hog producers on a retail pork weight basis. The Packer and Retailer shares represent gross margins (total sales less cost of goods sold) of packers and retailers. Many other costs must be deducted from these spreads in order to determine profits.

There is no “right” amount for any of these. Perhaps a better way to view them would be as percentages of the total retail price (Figure 3). Anyone can debate what the percentages “ought” to be, but in the absence of cost data and information about consumer preferences and product characteristics, that debate would be pretty pointless.

Compare Figure 3 to Figure 4 – pork vs. beef. The charts are obviously different. Producers get a much larger share of the beef retail dollar while packers/processors get a much smaller share. Interestingly, the retailers’ share is about the same.

Some would conclude that the beef margin structure was “better.” But consider the fact that over 40 per cent of most pork carcasses are cured and virtually no beef is cured. The packer/processor margin for pork must cover these extra costs and, thus, the packer/processor share for pork is greater than that for beef. In addition, the value of the beef hide creates a greater by-product credit that is applied to the packer share of the retail beef price. The beef shares structure that appears to treat beef producers better than pork producers may not be better at all. It is just different, perhaps only because the animals are different.

And finally, narrower margins are not necessarily better for anyone – even consumers or producers. What if Congress passed a law tomorrow that would make it illegal to sell anything but live pigs to consumers? The law would guarantee zero marketing margins and 100 per cent shares for producers. It would be a boon for hog producers, right? Far from it. How many pigs do you think we might sell in downtown New York – or to the Meyer family in rural Iowa – if the buyer had to do all of the processing? My bet is that the number would be far short of the roughly 95 million pigs from which products were sold in the United States in 2008. A footnote: the 95 million head figure excludes the 20 per cent of pork that was exported in 2008.

There is an optimal amount of marketing services (slaughter, processing, transportation, packaging, advertising, etc.) that optimize marketing margins and the utility that consumers derive from pork products. I don’t know of anyone who has determined those optimums. Theory tells us that highly competitive markets will achieve the output and marketing service levels needed to reach those optimums. The trick, of course, is determining whether markets are indeed competitive (or very close to it) and, if they are not, devising policy implements that are precise enough to approximate those results without causing other problems (inefficiencies, higher costs, etc.) that fritter away all of the gains. Let’s hope that is the focus of the policy debates in the coming year!

(Note: The current week’s data unavailable due to the holidays).

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