It’s been a historic period for the livestock markets and the wholesale meat markets.
Recently we have witnessed record high cash steer prices, record high cash hog prices, record high beef cutout values and record high pork cutout values. The reasons for these high prices are vast and include severe drought over several years in cattle producing regions of the U.S., a drought in the Midwest in 2012, and the onset of porcine epidemic diarrhea virus (PEDv). In this column I will discuss the back side of record high prices; what may probably happen as of result of record high red meat prices?
In late January the beef market soared upward into all-time highs with the choice beef cutout reaching $240 on Jan. 22. What then occurred should be a warning sign for what lies ahead. At this price level it became very evident that beef had priced itself out of the retail budget. At a wholesale price of $240, there simply were very few buyers of choice grade beef. Prices proceeded to decline sharply until a price level was reached that once again attracted some demand. Now, about two months later, the market place is suddenly facing the same dilemma.
There are a couple of differences now compared to late January that need to be explored.
First, the world wide economy appears to have weakened during the first quarter of 2014. Problems have surfaced in China, as they face an economic slowdown. In addition, the Japanese, a huge buyer of U.S. beef and pork, has also faced severe headwinds.
Finally, the U.S. economy has been struggling to generate strong economic growth. Three factors contributing to the sluggish U.S. economy are severe winter weather, steep heating bills and continued high retail gasoline prices.
The point is, with beef prices at record highs for the second time in 3 months, generally speaking, beef is going to be a hard sale given the worldwide economic conditions. Beef is in danger of becoming a luxury item that only the upper class can feel comfortable consuming.
In addition to record high beef prices, a new development has occurred in rapid fashion. Pork prices have soared over the last two months. Currently wholesale pork prices are also trading at record high prices. The continued spread of PEDv has recently created a panic in the wholesale pork trade. Fears of large baby pig death losses have swept the industry and kicked off a mad scramble to secure product before the short fall in production occurs. This panic has driven prices to record highs before production has started declining. Pork production during January and February was actually slightly above year ago production levels.
The week ending Mar. 8 was the first week that production dipped to below last year. The jury is still out regarding actual pig death losses and the exact magnitude of production losses. At the moment, that will not matter because record high wholesale pork prices, and beef prices will be immediately passed on to the consumer.
This spring the U.S. consumer and our export customers will be experiencing sticker shock. High prices, record high prices, will do the job of dramatically slowing U.S. red meat consumption and red meat export sales. What will happen is the U.S. poultry industry will be facing a dramatic increase in demand. Budget stressed consumers will move aggressively toward chicken as their meat choice. This will be driven mostly by price, but also by the longer term trend that chicken is healthier than red meat.
Young people, especially, seem driven by this theory. This will present a long term problem for the red meat industry, especially the beef industry. The long term trend toward less red meat consumption in the U.S. will continue and be exuberated by record high meat prices.
Finally, because of the physiology of the chicken versus the beef animal and the hog, the poultry industry can react in quick fashion to changes in demand. The industry is already gearing up to meet expected rising demand.
Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance does not indicate future results.
Dennis Smith has been a commodity broker for 26 years and works extensively with livestock and grain producers. Dennis publishes a highly respected and widely followed “daily livestock wire,” which is part of his brokerage services. A free 30-day trial to the livestock wire can be requested by emailing Dennis at firstname.lastname@example.org or calling 877-377-7905.