Iowa Farm Outlook - Beef and Pork Price Relationships03 December 2012
The relationship between the prices of beef and pork since 1990 are explored by Lee Schulz in the current 'Iowa Farm Outlook'.
Historically, beef and pork prices have moved somewhat together. They are substitutes in the consumer’s shopping basket and consumers tend to switch from one to the other depending on relative prices. Although there are many other factors that also influence prices for cattle and hogs this price relationship is important. One such importance is with respect to demand, which is a schedule of quantities consumers purchase over a range of prices. There was strong demand for pork in 2011. Compared to 2010 quarters, demand in 2011 increased 12 per cent in quarter 1, increased eight per cent in quarter 2, increased one per cent in quarter 3, and decreased four per cent in quarter 4 (2010 quarter 4 was a record high for pork demand). The stronger demand for pork in 2011 was likely due in part to the high cattle prices, especially in late 2010.
The ratio of cattle to hog prices on a live basis for 1990 through 2011 had been 1.70 meaning that the cattle price was 1.70 times the hog price on a live weight basis. However, there was a significant range in the ratio for any one month. Twenty five percent of the months were narrower than 1.50 and fourteen percent were over 2.00 during the 22-year period. There had been a trend to a wider ratio, particularly following 1996 (Figure 1). During 1998-1999, with low hog prices and the 2003 high cattle prices, the ratio was over 2.0. More recently, we have seen an increase in both cattle and hog prices, negating any drastic changes in the cattle to hog price ratio.
Figure 1. Cattle to Hog Price Ratio, Live Weight
Annual Average 1990-2011
On average, the spread has been the widest (higher cattle prices relative to hog prices) in November and December. It is lowest in June, July and August (Figure 2). As we look at 2012, we see that the ratios have widened as of late (Figure 3). Through October 2012, the ratio has averaged 1.90, above the 22-year average. The month of September averaged 2.32 and October averaged 1.98, both in the upper 20th percentile of the distribution.
The strong cattle market looks to be a bit outpacing the hog market in November. It is likely that hog prices will begin to rise into 2013 given the seasonality in prices and the decrease in placements the experienced seen this past year. Likewise, cattle prices typically strengthen into spring, and expect this to hold true this year given the current supply situation.
Figure 2. Cattle to Hog Price Ratio, Live Weight
Monthly Average 1990-2011
Figure 3. Cattle to Hog Price Ratio, Live Weight
New information that will help shape the hog and cattle markets in the near future include the fourth quarter Hogs and Pigs report due out on 28 December, the semi-annual Cattle report due out in January, and information about trade.
Feeder pig imports from Canada are tracking at par for 2012 compared to 2011. However, this may be slightly misleading because feeder pig imports have been down to the degree of 7.5 per cent since the end of September. The last three weeks have seen a 15 per cent average decrease compared to this time last year. What is driving this and may continue to drive this? Much like the US, Canada has experienced fewer sows farrowing and farrowing intentions. Slaughter barrow and gilt imports from Canada have also been significantly below year-ago levels, 22 per cent on average. US pork production in 2013 is expected to decline compared to 2012. Look for slaughter hog prices to average above a year ago in the first quarter of 2013. Seasonal price increases are expected to take prices in the spring-summer to break-even to profitable levels (Iowa State University Estimated Return Series). How much pork production changes in the second half of 2013 depends on the amount of breeding stock liquidation that happens during the next few months.
Feeder cattle imports from Mexico and Canada have offset declining US feeder supplies since 2009. In the first half of 2012, Mexican imports were continuing that trend with a record pace of drought forced sales of cattle. As the industry moves into 2013, some things about the cattle supply are becoming clearer and some are still uncertain. What is clear is that two more years of liquidation have put the industry in an even tighter supply situation. The 2013 US calf crop is likely to be the smallest since 1942. What is also clear is that feeder cattle imports will drop dramatically. Mexican cattle imports have decreased sharply in late 2012 and will likely decrease even further in 2013.
What is unclear is the persistence of the drought. Continued drought will moderate the short-run effect by provoking more liquidation and postponing heifer retention. If drought conditions improve, herd inventories will stabilize and some heifer retention may begin in 2013. It will be increasingly difficult to find placements to follow current feedlot inventories. All in all, it looks increasingly likely that a significant decrease in cattle slaughter and beef production is unavoidable in 2013 and 2014.