The relationship between consumer demand for pork and live hog prices has been getting more erratic over the past few years. Live hog demand has become more inelastic over this time, which has caused violent price reactions to small changes in the live hog supply as well as pork demand.
For example, demand for pork at the consumer level for much of 2000 was close to 1999 levels, yet demand for live hogs showed sharp growth. Although consumer pork demand was similar to 1999, live hog prices at the terminal markets were about 35 percent higher than in 2000 – also, 51percent to 52 percent lean hogs were up 31 percent to 32 percent from 1999.
According to Glenn Grimes and Ron Plain, University of Missouri agricultural economists, normal elasticity was -0.5 for many years before the 1990s. The past year’s results would suggest an increase of about 12 percent in demand. Even if you used a -0.3 elasticity level, it would indicate a demand increase of only 6 percent to 7 percent in 2000.
All this stands as one more example that the old market rules no longer apply. With live hog demand more inelastic it means smaller increases in production will lead to wilder swings in live hog prices. When this happens, combined with market hog numbers putting pressure on packing capacity, the results can create crashes like the one seen in the fourth quarter 1998.
Due to productivity increases and slight expansion, 2002 is expected to produce around 104 million hogs, which will once again pressure packing capacity. In this new era of demand elasticity that could mean a repeat of live hog prices of 1998 – and that’s something to consider when outlining your business strategies.