Will higher prices associated with pork in the U.S. begin to erode the demand for pork permanently? For most products, if the price rises, people consume less of it and seek substitutes. They usually return to previous purchasing patterns when the prices return to previous levels. However, when the prices rise over a whole range of goods in an economy and income is stagnant, something else happens.
The consumer demand for pork and all goods can be reduced and may not return to previous levels even when the price of pork and other goods comes back down. This phenomenon known as demand destruction is quite different than buying less pork when its prices have increased on a transient basis. Not only can it happen among U.S. consumers, but it can also happen among consumers in key exporting countries as the result of persistent inflation.
Prices Push Higher
Many things are working to push prices higher, and those increased prices are being felt very broadly in the economy. Some appear to have already peaked, like housing costs because the Federal Reserve System has raised the cost of the home mortgage to the point that demand has been slowed significantly. Gas prices seem to have peaked. Most people have seen a significant erosion in their retirement savings which also works to cool purchasing by giving people an uneasy feeling about the future. The rate of savings has dropped from pre-pandemic levels and credit card purchasing has risen substantially.
At first, people try to maintain their previous standard of living by using credit and shaving costs at the margins through couponing, going to sales and trading down to house brands for things like cigarettes, beer and other household items. When inflation is persistent, however, people begin making permanent changes in their buying habits to match the new higher cost of living and a shrinking income.
Pork Exports Drop
We have watched the weekly slaughter of hogs begin to rise again, briefly exceeding last year’s levels for the first time in May and being close to the same in the year-over-year comparison for June. This has occurred while pork exports have been running about 16% behind 2021 levels so far (which were huge by any comparison).
Mexico has been the brightest spot with growing purchases year over year. We have become accustomed to profitable near-constant expansion potential as an industry in the U.S. and that expectation may need to be adjusted down over the next few years. A growing world population is not the principal reason for optimism regarding future demand for pork, rather it is growing world income. The countries which are growing in population now are primarily the poorest third of nations worldwide and their consumption of meat is very low compared to developed countries.
When Will Inflation Slow?
The U.S. central bank is working overtime to slow inflation to their target level of 2% to 3% per year and we are fortunate in the U.S. to have relatively effective tools at their disposal. However, many other places, such as the European Union and the United Kingdom have more difficulty because of the common currency (euro) but still separate “country” economies, productivities, spending patterns and the like. A policy to slow spending in Germany for instance may cause increased spending in other EU countries whereas with the U.S. system of states, a more homogenous (but certainly not identical) response is made among the states to Fed policy tools.
Wild Cards Remain
The wild cards in our future economic situation reside in the Ukraine and in China right now. Continuing smoldering without a defined end to the hostilities in the Ukraine will drive worldwide inflation, especially in foodstuffs (both production costs and grain costs), but also in energy costs as Russia uses reductions in its gas pipeline supplies coming into parts of Europe as a weapon to soften sanctions placed against it by EU governments.
China is the most volatile and consequential element in world economic stability over the next couple of years, showing signs of significant headwinds to growth. Closures due to COVID-19 policies, an upside-down real estate market and the prospect of less demand for manufactured goods, while the world grapples with inflation, could send China into a recession. If that happens, inflationary pressures could heat up further as China slows the output of goods to the world market. This would make U.S. Fed policy tools less effective and lead to very slow growth in worldwide demand for pork.
More from Farm Journal’s PORK:
Challenges Build on Both Sides of the Profit Equation
The Global Agricultural Supply Chain: A New Battlefield
The Long-Run Impact of the Great Resignation
