Competing Meats Will Apply More Price Pressure

Competing Meats Will Apply More Price Pressure

As beef production declines, wholesale and retail beef prices will likely increase. At the same time, looming pork and poultry expansion will make it harder for beef to compete on price.

Part of the perfect price storm that cow-calf producers are enjoying comes with the fact that prices of competing meats are higher than expected due to less poultry and pork production than anticipated. That could change fairly quickly, though.

According to the most recent quarterly USDA Hogs and Pigs report, hog inventory on Sept. 1 was 2% less than the previous year. However, the breeding inventory was 2% higher and a smooth 1% more than the previous quarter.

“Farrowing intentions are up as much as 4% in coming months,” explains Derrell Peel, Extension livestock marketing specialist at Oklahoma State University, in his weekly market comments. “For the past 17 months, the Porcine Epidemic Diarrhea virus (PEDv) has resulted in significant piglet mortality to keep 2014 pork production modestly down year-over-year. The disease is not controlled and is expected to increase this winter, but the pork industry is attempting to increase farrowings enough to more than compensate for losses due to the disease. Pork production is expected to increase year over year in 2015.”

Although broiler production increased less than 2% so far this year, Peel says it is poised to increase by almost 4% in 2015.

Beef prices have shown less sensitivity to poultry prices in 2014 than expected, but abundant poultry supplies will increase the challenge for beef prices to push higher in 2015,” Peel says.

Through the first three quarters this year, Peel notes beef wholesale and retail prices increased fast enough for packers to maintain positive margins while still allowing feedlot profitability.

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Through August, retail beef prices were almost 11% higher year to date, according to Peel. But, he notes, “Retail prices do not currently reflect all of the wholesale price increase and the coming months will be even more important for beef demand as retail adjustments continue.”

Plus, snugging supplies and sparser slaughter says beef prices must grow.

At the beginning of August, Peel says heifer slaughter was about 11% less than the previous year; cow slaughter was 8.8% less, and steer slaughter was down 2.9%.

All of that is to say that it’s crucial for U.S. beef to maintain robust domestic and international demand.
 

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“Recent declines in boxed-beef values have raised concerns that beef demand may have reached a limit, although there is no specific indication of that as yet,” Peel says. “Packer margins turned negative as boxed-beef prices declined more than fed cattle prices. Feedlots will face increasing breakevens in the fourth quarter due to high feeder cattle purchase prices. Feedlot margins may turn from profits to losses if fed cattle prices are unable to increase.”

He goes on to say that if beef demand is limited, the packer and feedlot margin squeezes could persist as part of the lengthy process of the beef industry adjusting to a demand-limited size. “Eventually feeder cattle prices would adjust as well, but it would likely take several months. A more likely scenario is that demand will continue to grind higher but perhaps at a slower pace than in the first half of 2014. Packers and feedlots may face more margin squeeze as limited input supplies push input costs up faster than output prices are able to increase. As it has been for many months and even more so in the coming months, beef demand is the key.”

With all of that said, consumer beef demand had proven more inelastic through the price run-up than many expected.

On a related note, the Restaurant Performance Index (RPI) was 1% higher in August than in July, the first gain in three months, according to the National Restaurant Association (NRA).

“The August gain in the RPI was fueled by stronger same-store sales and customer traffic results, aided by continued improving economic conditions,” said Hudson Riehle, senior vice president of NRA’s research and knowledge group. “Looking forward, restaurant operators remain generally optimistic about continued sales growth, while a majority plans to make a capital expenditure in the next six months. However, operators still report food costs and government among top challenges that continue to negatively affect the operating environment.”
 

 

 

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