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CME: Decline in Meat Prices Not Reflected at Retailers

20 November 2015

US - Beef and pork prices at the wholesale level has declined sharply since their peaks in 2014 but that has yet to show up in any significant way at the retail level, write Steve Meyer and Len Steiner.

The latest retail meat price data collected by the Bureau of Labour Statistics and reported by USDA shows that October retail prices for beef, pork and chicken were higher than the previous month and only marginally lower than last year’s levels.

Indeed, while prices for a number of beef, pork and chicken products are now at some of the lowest levels in the last four years, retail prices remain dramatically higher than what they were in 2011 or 2012. And as the charts show, once retail prices hit certain levels, it is particularly difficult for retailers to bring them down at the same rate or even t the same level as what they used to be.

In part this reflects overall inflation in other components of running a business, from labour costs to healthcare to transportation.

This disconnect between wholesale and retail price transmission (which is not new by the way but much more dramatic this year) tends to add to the volatility and short term downward pressure for a number of meat items.

One caveat that we always like to mention when discussing the retail price series is that it does not give a weighted average price based on promotions and other discounts.

As a result, the series may miss short term adjustments, especially when retailers for instance offer deals like buy one get one free or sell a large volume of a given product at a special discount. It is an important caveat that has plagued the retail price series as long as we can remember.

The latest data showed that the choice retail beef price in October was $6.23 per pound, slightly above September prices and just 0.2 per cent lower than a year ago. The wholesale choice beef cutout in October, however, was quoted at $2.11 per pound, 14.7 per cent lower than a year ago.

The decline in the choice beef cutout the last three months is one of the biggest we have seen in the last 20 years. The only comparable correction is from 2003 when a case of BSE shut down many US beef export markets and forced more supply in domestic channels.

It is interesting to note that back then retail beef prices adjusted modestly following the wholesale price decline but thee years later retail prices were still hovering near pre-BSE levels while wholesale prices had pulled back lower.

The current spread between the choice retail beef price and wholesale prices may be the biggest on record but the ratio of the two is not. Currently the retail price / wholesale price ratio is about 2.95. In the last quarter of 2009 the ratio was around 3.05.

The difference, of course, was that in the last quarter of 2009 the US economy was going through the biggest crisis since the Great Depression while today US growth is relatively good.

Still, the takeaway is that whenever we there are either demand or supply shocks, the impact on wholesale prices is much more immediate and dramatic than at the retail level. Pork wholesale prices in October were quoted at $3.97 per pound, 1.4 per cent higher than the previous month and just 4.2 per cent lower than year ago levels.

After falling in the first half of the year following the sharp correction in wholesale pork prices, pork prices at retail have been moving higher in the last few months, quite an interesting development given that the increase in wholesale pork prices actually has been quite minor.

The pork cutout for October was quoted at by USDA at $0.87 per pound, 22.5 per cent lower than a year ago.

The current pork cutout value is comparable to the levels we saw in the last quarter of 2009 and then again the last quarter of 2012 (see chart). And yet, current retail pork prices are near $4 per pound while in 2009 they were under $3 per pound and in 2012 they were around $3.50.


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