CME: Lower Pork Prices Needed for Volume Movement

by 5m Editor
15 May 2012, at 1:06pm

US - One of the arguments for the continued weakness in the pork market has been that prices at the consumer level have not adjusted quickly enough to clear the market, write Steve Meyer and Len Steiner.

While export shipments have been strong, at least through Q1, lower prices have been needed to stimulate volume movement. More recently, however, the conversation among market participants has focused on the willingness of domestic retailers to lower prices in order to clear the perceived supply backlog.

Stickiness of retail prices, or price rigidity, is an old subject in economics. Retailers and foodservice operators are reluctant to change prices often, both because of how they perceive consumer responses to such changes but also because of the costs inherent in changing prices often.

Prices tend to be more sticky at the foodservice level. This is understandable considering the expense in changing menus, revising in-store promos as well as the long term established marketing calendars that are tied to advertising campaigns. Large foodservice chains provide exceptional efficiencies of scale but they also have significant bureaucracies that make quick price changes difficult to implement.

Retailers tend to be more nimble in making price changes but even there price stickiness persists. Retailers are wary of confusing the consumer and want to see if lower or higher prices will persist before making a change. This happens both when prices move up as well as they move lower.

The chart to the right compares price inflation for pork at both the wholesale (PPI Index) and consumer level (CPI Index). The Bureau of Labor Statistics issued yesterday its latest PPI reading, which showed that the pork PPI index in April declined 10.7 per cent from the prior month.

To fully appreciate the extent of the price decline in April, consider that this is the largest month / month change in the PPI index since at least 1990, surpassing even the monthly price changes in the summer and winter of 1998. The pork PPI index was down 9.2 per cent from the previous year. As the chart shows, we have seen larger year/year retractions and the extent of the recent pullback still is smaller than what we observed in 2009.

What the chart also shows is that the decline in pork prices at the consumer level, as expected, tends to lag declines in producer prices. The magnitude of the price swings at the consumer level is smaller since raw material is only part of the costs that retailers face. Also retailers use their margins as shock absorbers to smooth out the much more volatile raw material price changes.

The CPI data for April was released a few minutes ago and it showed that the pork CPI index was 2.8 per cent higher compared to a year ago. Pork price inflation at the retail level has subsided in recent months, coincident with the pullback in wholesale values. Indeed, counter to perceptions in the marketplace, inflation in consumer prices is in line with what we have seen in prior years.

The pork CPI should be adjusting further in the coming months and likely turn negative this summer. The most recent evidence of rapid disinflation in pork prices was in the fall and winter of 2008/09. At that time, prices at the retail level lagged the pullback in wholesale prices by about 4 months. In other periods the adjustment was quicker, depending on the magnitude of the decline in the PPI.

Consumer price inflation for other proteins has outpaced pork. The consumer price index for beef and veal was pegged at 261.127 (index value 1982-84 = 100), 5.9 per cent higher than a year ago. The index for chicken parts (this includes breast meat, leg quarters, wings, etc) was quoted at 209.923, 4 per cent higher than a year ago. The overall food CPI in April was pegged at 233.15, 3.15 per cent higher than a year ago. Food price inflation in the US accelerated last year, peaking at a year/year rate of 4.71 per cent last December. Food price inflation has eased since then and it currently is tracking moderately above the overall consumer price inflation, which in April was up 2.3 per cent.