CME: Increase in Meat Prices Begins!

US - CME's Daily Livestock Report for 15th October 2008.
calendar icon 16 October 2008
clock icon 4 minute read

It appears that the long-discussed (at least by us!) cost-driven increase in meat prices has finally begun. The chart below shows USDA’s monthly estimates of retail prices for all-fresh beef, pork, composite broilers and turkey. These prices utilize data gathered by the Bureau of Labor Statistics. Weighted averages are computed using carcass proportion weightings, not sales weightings. That is, a pound of retail beef here represents one pound of beef comprised of x percent t-bone steaks, y percent round steaks, etc. where x, y and the other weightings are the percent of a carcass comprised by that particular cut. The All-Fresh beef price includes prices of Choice and Select grade beef as well as “no-roll” or ungraded beef sold in some stores.

There are some shortcomings to these data, the most obvious being that meat cuts are not sold through retail stores according to carcass proportions. Some cuts are over-represented at retail while others are sold more heavily through foodservice. But computing the prices in this manner implicitly assigns a value to all of the product produced in the U.S. and using the retail price of those products is reasonable since retail is generally the marginal market for meat products.

Proponents of subsidized biofuels have blamed the food price increases that occurred through mid-2008 simply on higher transportation costs. On that point they are largely correct. Many food items contain only small amounts of grains, oilseeds and their products so higher ingredient costs would not cause much higher prices for these items.

But claims that relatively flat retail meat and poultry prices were evidence that using grains and oilseeds for fuel would have little impact ignored a critical factor: Time. We (and other analysts) have warned that higher grain and oilseeds costs would eventually have a much larger impact on poultry and meat prices than they were having on other food items simply because it takes far more grain and oilseeds to produce protein. The higher costs, though, had to cause financial losses and the resulting reduction of supplies before prices would rise. That impact is beginning to show up in the data.

The graph at left shows that both beef and pork prices have risen steadily since April and March, respectively, and are now record high. Turkey prices have risen by a more modest amount and chicken prices are about flat SO FAR. Sharp reductions in egg sets in recent weeks will almost certainly result in higher chicken prices by year’s end. Further, ALL of these sectors are in the midst of reducing their breeding herds and flocks, suggesting lower production and still higher prices in 2009.

How high? That depends on long-term cost levels and how the farm-to-retail price spreads adjust. If pork producers must cover farm-level costs of $80/cwt carcass, retail pork prices must go to $3.34/lb. if farm-retail spreads remain at 2007 levels in dollar terms or $4.82/lb. if spreads remain at 2007 levels in percentage terms. Breakeven costs of $110/cwt live for fed cattle would imply retail beef prices of $4.37 to $5.09/lb under the different spread situations. We feel spreads will return to the same PERCENTAGES, so the upper ends of these ranges are very, very possible.

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