Commentary: How high is high?

A trip to the supermarket today makes it readily apparent that meat prices are creeping higher. How high they will go is anyone’s guess, as live-animal prices and futures quotes for hogs and cattle have ventured into unchartered territory setting record highs. With all of the other economic pressures they face, consumers will likely respond to retailers’ features on meat cuts, buying whatever cuts give them a price break for the week.

On the pork side, U.S. hog and pork supplies have been on the decline over the past three years, but demand has been a significant driver in terms of prices over the last six months. USDA’s March Hogs & Pigs Report confirms that this year’s supply will nearly equal that of 2010, but from a wider view, global pork—and meat—supplies are tighter. 

That brings the export factor into play, and like Jim Lochner, Tyson Foods chief operating officer reported at a J.P. Morgan conference this week, “with extremely strong exports, it’s likely there will be even less meat and poultry (domestically) per capita (this year).” That will, of course keep prices up.

U.S. pork exports have been particularly healthy since last fall. According to USDA's March Livestock, Dairy and Poultry report, U.S. exporters shipped almost 369 million pounds of pork in January-- 17 percent more than a year ago. It’s always worth noting when China is in the market, and it bought almost 26 million pounds of U.S. pork in January, compared to less than 1 million pounds a year earlier.

It’s estimated that 21 percent of this year’s U.S. pork production will be shipped to other countries; last year, that share was 19 percent. In terms of volume, 2011 is looking at exporting 4.675 billion pounds of pork, which is almost 11 percent higher than in 2010.

Japan’s earthquake and tsunami devastation gave everyone pause, and rightly so. The markets turned lower temporarily until the nervousness subsided. Japan has a long road ahead of it and economically the pain will linger, which raises concerns over the country’s ability to import goods. That of course is worth watching as Japan is U.S. pork’s No. 1 customer. In the near term, however, Japan may need more of the world’s food products as its own production system suffered severe disruptions.

As Tyson’s Lochner points out, in the short run, Japan could increase its “imports of protein. In the long run, I think it will be pretty much business as usual.”

Domestically, grilling season will soon be here, and that typically influences buying decisions, a bit more for beef than other meats. Beef prices are likely to run higher than pork and poultry, so shoppers may look for alternatives. So far, consumers have stayed true to pork both at the grocery store and when dining out.

 “At this point, we have not seen a dramatic amount of consumer fatigue due to pricing,” said Bo Manly, Smithfield Foods, chief executive officer, and the same J.P. Morgan event. Although he added there is a limit and consumers could back away from the higher-priced cuts and premium brands. 

The thing is, meat and food aren’t the only price increases that consumers are facing. Which begs the question, will high-priced gas cool down pork demand? “That’s a valid concern on several accounts,” says Steve Meyer, president of Paragon Economics. “If gas holds over $100 a barrel you’re going to have a cooling effect on a lot of economic activity not just in the United States, but globally as well.”

Bottom line, if U.S. consumers are paying $3 or $4 for gas, they’re either going to drive less or spend less money somewhere else.

While there is much uncertainty in all of the markets—grain, oil, meat— as well as domestically and globally, there’s also the basic agreement that there is a fundamental shift underway.

“The drivers of (meat) profitability and production have changed,” Lochner notes. “The old paradigm was that profitability and production are driven by domestic demand. The new paradigm is that they are largely driven by grain costs and exports.”

The question for that new paradigm is how high is high?