Pork's Demand Indicators Holding Strong

by 5m Editor
31 January 2012, at 7:21am

US - It appears 2011 domestic pork demand will end the year showing a gain compared to 2010. I say "it appears" because the final pieces of data – December pork exports and imports – will not be available until mid-February, writes Steve Meyer in this week's "Market Preview" featured in National Hog Farmer magazine.

My calculations for December 2010 through November 2011 show demand 1.2% higher than the same period 12 months earlier. Plus, the calculations of University of Missouri Agricultural Economist Ron Plain, who used estimated December trade figures, indicate demand will be positive for the 2011 calendar year.

That record was built with solid gains in the first half of the year and "hanging on" in the second half as burgeoning exports reduced the amount of pork available in the United States and, I believe, a softening economy slowed the pace at which retail prices could be increased. Retail prices still set a record in September at $3.56/lb. and remained near that level ($3.46/lb.) in December, but steady demand would have pushed those values even higher given larger exports and concurrent lower domestic availability/consumption.

What Lies Ahead?

Domestic US pork demand is a key determinant of the demand for live hogs since nearly 80% of our muscle meat products are sold here at home. But it is far from the only factor.

Live hog demand is also directly impacted by export demand for US pork and the demand for pork by-products, such as organ meats and skins.

Muscle cut exports in 2011, as we all know, are going to end the year with record-high levels in terms of quantity and, more important, value. Through November, the value of US pork muscle cut exports was 30.1% higher than in 2010, while volume was up “only“ 22.2%. Average value per unit for January-November was $3.04/lb. compared to $2.85/lb. during the same period in 2010.

While exports of variety meats have not grown by as much as those of muscle cuts, 2011 will almost certainly be a new record for those shipments as well. Through November, variety meat shipments were up 6.2% in volume and 18.9% in value. That means the average price of US variety meats this year through November was $1.335/lb. That compares to $1.192 for the same time period in 2010.

Add those in and US hog demand has been strong indeed. Figure 1 shows the history of the hog price-pork production relationship since 1962. In spite of some short-term setbacks, the pattern is clearly a march toward higher output and higher prices, two factors which, when combined, mean higher demand. That should not be a surprise as US population grows by 0.8 to 1.0% per year and this time period represents major advances in the opening of international markets. There were simply more and more potential buyers of US pork and pork by-products both at home and abroad.

In addition, the economic well-being of most of those buyers was increasing, providing them with more money to spend on food. Significant growth in disposable incomes in the United States and its key export markets in Asia provided the wherewithal for consumers to pay more even as they bought more. The two factors are the essence of higher demand.

I have just "eye-balled" the graphics added to this scatter diagram, but the difference of the hypothesized demand relationship for the 1990s is interesting. All of the other blue arrows have roughly the same slope – save for the one for the ’90s. I believe the steady closure of packing plants and right-sizing of the packing sector during that decade left far less volume flexibility in the US packing sector and caused hog demand to get much more inelastic.

Additions to capacity have helped the situation since the dawn of the 2000s. Add in a much more carefully aligned production-processing system and I believe we have seen far fewer output surprises that have put significant negative pressure on prices in the past. The low prices observed for 2009 were partly due to higher-than-expected supplies that summer, but the primary driver was H1N1 influenza and its short-term impact on domestic demand and longer-term impact on exports.

It appears we moved to a new price-quantity relationship in 2011. Can we stay there? Absolutely – IF exports remain strong and domestic demand can get back toward the growth we saw in the first half of that year. I think both are quite possible, so I have 2012 prices very near that new blue line through the 2011 observation.