What Do Record-High Hog Prices Teach The Beef Industry?

The week of Aug. 16 saw hog prices set a record high at just over $90.43. It eclipsed a 17-year mark set after the pork industry’s dramatic consolidation

The week of Aug. 16 saw hog prices set a record high at just over $90.43. It eclipsed a 17-year mark set after the pork industry’s dramatic consolidation and restructuring of the 1980s and the launch of the “Other White Meat” campaign.

The pork industry’s last 17 years are similar to what we’ve seen in the packing and feeding industies – concentration and increased economies of scale, along with new technology and improved genetics, which led to higher levels of efficiency. That efficiency and its resulting cost reductions enabled producers to both accept lower margins and maintain margin levels despite overall inflationary pressures and increasing supplies.

This new record-price level for hogs in 2008 is unique in that it was set without a reduction in supply (pork production is up nearly 9% on the year). The driver in hog prices has been demand, not domestically but via exports, the same as in the beef industry.

Two weeks ago, we saw a near-record drop in hog prices, the result of slumping exports and not really reflective of either domestic demand or supplies. Thus, the hog market is once again validating my theory that domestic supply and demand are now secondary items in predicting price levels for our products. The two primary factors needed to determine long-term pricing levels are now global and political in nature. Export demand, market access and global supplies, coupled with political initiatives (e.g., ethanol), have become the drivers.

Understanding the ramifications of Russia's recent aggression toward Georgia and its likely impact on market access, discerning the differences in farm policy, changing attitudes toward free trade and energy policy depending on whether Obama or McCain is coupled with a strengthened Democratic majority in Congress, are the factors that will have the most impact on livestock prices and profitability.

Even our key metrics regarding consumers are shifting. A decade ago, our concerns were eating quality, consistency, uniformity and relative price relationships between competing meats or alternative sources of protein. It’s not that issues such as aggregate domestic supply and demand figures are irrelevant; it’s that our success in addressing these issues has moved them well down the priority list.

The branded revolution, along with industry initiatives, has removed some of these concerns about our products. It’s thus allowed consumers to begin to differentiate our product on other issues, such as whether the product is locally grown, natural, organic, humanely treated, traceable or perceived to be environmentally and nutritionally positive. We’ve found that consumers will afford what it is that they want, and the real driver is in our ability to identify and respond to those consumer desires.