As we move into the fall quarter, the usual expectations of declining prices and heavy weights are before us, but will they be realized and to what extent? Slaughter is running several percentage points below last year and profitability has been good for most pork producers through the summer months. What could unfold in potentially unusual ways?
Most of the atypical factors will likely stem from inflation and how it impacts consumer behavior in the U.S. and abroad. At the time of this writing, U.S. inflation is around 8%. To give you an idea of how serious that is, if it were to continue, we’d expect the prices of goods to double in about nine years.
Global inflation is still quite rampant and might continue to resist efforts to bring it under control. The resistance comes from continued spending and political actions designed to force the war between Russia and Ukraine to a negotiated settlement.
When it comes to inflation, there are some conflicting bits of data but two underlying explanations.
1. Unemployment Ahead?
Right now, there are lots of employment opportunities. However, unemployment is expected to rise as businesses feel the effects of the Fed steadily raising interest rates. Certain sectors are laying off people, but many parts of the economy, including a lot of agriculture, are hiring (and even offering substantial sign-on bonuses) in an effort to reach normal production capacity. This clouds the picture for the Fed and others who are cautiously watching unemployment numbers for signs of a slowdown. When these deficits of employees are filled, a somewhat sudden and larger-than-anticipated crash in layoffs might signal a descent into a recession.
2. Revenge Spending
When the pandemic hit, many people reduced spending and went into a safety-first saving strategy, squirreling away an incredible amount of savings by dramatically curtailing discretionary spending. Now that the pandemic is over, people feel the need or think they now deserve to take that cruise or buy that new car or home, regardless of whether a purchase is wise or even a good deal. That’s revenge spending. It’s a psychological “getting even” with the deprivation caused by the pandemic. This type of spending can also create counter movements and noise in the data patterns, which should be emerging with climbing interest rates.
No doubt all of this affects food purchases, including meat purchases. The shorter-term outlook is for reasonably plentiful supplies but at elevated costs of production. Recent events suggest the Russia–Ukraine war is far from reaching a resolution. The pressure placed on world energy supplies and some agricultural inputs, such as fertilizer, though workarounds is beginning to show some promise. The ability of Russia to supply oil to world markets, in spite of sanctions, while metering down natural gas supplies to Europe, dramatically raising costs of everything from electricity to home heating for the coming winter, is particularly vexing. Almost everyone in the pork production chain has been tacking on temporary price surcharges, which increases the retail price of pork beyond the normal relationships we typically observe in the farm to retail spread.
Will meat prices get high enough that demand destruction takes place? When prices remain high for an extended period, causing a permanent decrease in demand, that’s demand destruction. For savvy consumers, buying the loss leaders from the meat case can help keep the cost of meals at home relatively bearable. However, in the intermediate term, the total meat supply in the U.S. is likely to decrease around 1% to 2% primarily due to declines in both pork and beef production. Avian flu is causing problems in over 35 states but has primarily been an issue in turkeys and laying hens.
More from Farm Journal’s PORK:
What We Can Learn from the Europeans About African Swine Fever
Challenges Build on Both Sides of the Profit Equation
The Global Agricultural Supply Chain: A New Battlefield
