CME: Producers Losing Money Despite Near-Record Prices

US - CME's Daily Livestock Report for 1 August 2008.
calendar icon 4 August 2008
clock icon 4 minute read

Many of the historical relationships and patterns that have framed our efforts to analyze markets continue to provide information that can aptly be characterized as a bit schizophrenic.

E-Livestock Volume 8/1/08 7/31/08 7/28/08
LE (E-Live Cattle): 16,239 11,856 9,195
GF (E-Feeder Cattle): 2,377** 1,367 520
HE (E-Lean Hogs): 19,740 18,219 10,966
**Denotes a new record for Globex volume

Consider a few developments from recent weeks:

  • Demand index estimates from Professor Glenn Grimes of the University of Missouri indicate VERY soft U.S. consumer-level demand for meat. His computations for January-June 2008 show consumer-level beef, pork and chicken demand down 4.7%, 2.3% and 5.5%, respectively, from one year ago. Turkey demand is down 5.1% for the same time period. All estimates use a consumer-level demand elasticity of –0.75. Why the declines? Lower per capita domestic consumption driven by growing (and in the case of pork, HUGE) exports and retail prices (or, at least, retail price data) that simply have not kept pace with inflation, much less risen as one would expect if demand is stable and domestic supplies are restricted. Will the lower supplies be reflected in higher retail prices over time? Probably. Historic relationships (for what those are worth these days!) indicate that retail prices tend to lag supply changes anywhere from 3 to 6 months and retailers are genuinely concerned about food price sticker shock at present. But costs must be covered eventually and price increases will eventually help the demand indexes improve.
  • Record or near-record wholesale values for every meat species. Record-high pork cutout values were documented in Thursday’s DLR. Beef cutouts, both Choice and Select grade, for the week of July 12 were the 3rd highest on record. The 12-City Broiler Composite price was also record-high the week of July 12. Eastern region hen turkey prices have not hit a record this year because they are very seasonal with annual highs reached each fall. However, every weekly price thus far in 2008 has been record-high for the respective week, leading us to expect a record when the normal seasonal peak is reached around November 1.
  • Strong counter-seasonal moves in both beef and pork. The pork cutout value has made a late-season top after appearing to make an earlierthan- normal top back in May. Beef cutouts defied the usual summer downtrend with steady values through May and June before the big July surge to near-record levels. There isn’t much “season” in the 12-city broiler price series but, if anything, the summer highs have been stronger this year. Given the Mizzou consumer-level demand indexes, we have to conclude that this strength is built upon robust exports.
  • The vast majority of producers of all species are still losing money. While feed ingredient prices have fallen some, cash corn, DDGS and soybean meal are still 68%, 82% and 85% higher, respectively, than one year ago. Corn and soybean futures have stabilized somewhat over the past 2 weeks. USDA’s August 12 Crop Production report will provide the first objective measurements of yields for this crop year.

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