Lean hog futures continued tumbling from their late-March highs this week as record-high prices seen in March drop to levels traders deem more in line with pork demand. Several factors, however, are piling on simultaneously resulting in the sharp pullback seen in lean hog futures and cattle futures alike over the past several weeks.
High retail meat prices have sparked concerns that meat demand is softening. Adding to the selling trend is cool, wet weather which has likely nullified a robust start to the grilling season. And less grilling means that chops and steaks remain in supermarket coolers rather than in shoppers’ grocery carts.
Declining meat consumption by U.S. residents has been a source of industry concern for some time. “The recent decline in meat consumption is likely a symptom of the longer term trend of declining per capita beef and pork consumption,” says Glynn Tonsor, Kansas State University agricultural economist. “In the first quarter of 2011, per capita beef and pork consumption were 14.3 pounds and 11.9 pounds respectively, down from 2006 values of 15.8 pounds and 12.4 pounds.”
Higher prices at the gas pump also have taken a toll on meat demand as consumers have less cash in their wallets for premium cuts of meat. “High gasoline prices have depleted disposable incomes, very likely reducing meat expenditures at both retail and foodservice,” according to the CME Daily Livestock Report.
For typical households the reduction in disposable income spurred by increased gasoline costs is expected to reduce consumption of more expensive meat products. “However, the net impact of this on livestock producers is less straightforward,” says Tonsor. “While export strength appears persistent, the reduced domestic per capita consumption may have left the industry with a less price sensitive domestic consumer base.”
The selloff over the past month may foretell further weakness ahead adding pressure to dwindling hog production margins. “Perhaps more ominous is the penetration by all lean hog contracts through August of key support established back in mid March,” according to the Daily Livestock Report authors.
Consumer preferences, however, suggest there is a bright spot. Bacon, for example, is appearing on more and more menu items. “The pork cutout value is up notably over 2010 levels,” says Tonsor. “Bellies, which account for only 16 percent of the carcass, have contributed about 50 percent to the increase in overall cutout value.”
Primals such as loin and ham have made notably weaker contributions to cutout value. “These differences in related demand strength across products can be seen as a positive or as a negative, adds Tonsor. “Loin value likely will remain checked by poultry substitutes.”