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CME: Meat Prices Higher Than a Year Ago

09 November 2017

US - Meat prices have been higher than a year ago for much of this past summer and fall despite a net increase in the amount of protein flowing into domestic channels, reports Steiner Consulting Group, DLR Division, Inc.

Futures have responded by bolstering forward prices to account for the improvement of consumer demand. We will discuss demand a bit more in detail later in the week by looking at per capita expenditures. But there is one point in this discussion that should be highlighted.

To understand product flow in the domestic market, and potential shifts in demand, we track the volume of beef and pork trading in the open (negotiated) market. This is possible thanks to the transparency offered by the Mandatory Price Reporting system and the data is reported daily by the USDA Agricultural Marketing Service.

This makes for particularly timely information flow. In addition to tracking the absolute number of loads trading in a given day or week, we also look at the relationship of the volume traded in the open market relative to the number of cattle or hogs slaughtered.

But why track the volume? The short answer is that the negotiated market is where price discovery happens and it makes sense to know whether packers and buyers negotiated over 5 or 50 loads of beef or pork.

Over the years, the system has evolved where a number of regular users will pull a certain amount of product through either formula or forward orders. While some orders are firm, i.e. a buyer has committed to take a specific number of loads, others are simple agreements on how to price the product with the understanding of a general range of volume that will be needed.

This range depends on domestic demand, business growth and seasonal needs. When demand is good, the end user may buy a little more than anticipated. And when demand starts to flounder, the packer may be left with a few more loads than earlier expected.

If that happens, suddenly the volume offered in the open market increases and lower prices are required in order to either get some users to buy and put in inventory or get traders to buy it and sell later in the year. The reverse is also the case.

The following chart shows the ratio of beef loads traded in the negotiated market vs. fed cattle slaughter. The ratio declined sharply in April/May and then again in late Sep/early Oct, periods when we saw a notable runup in wholesale prices.

With less meat available in the open market, users that normally buy spot had little choice but to compete more vigorously and run up the price. We have yet to see the ratio improve and with limited spot meat availability it seems likely that, in the short term, wholesale beef prices remain well supported.

Last week there were 319 loads of choice beef traded in the negotiated market vs. fed slaughter of around 517,000 head - a ratio of 62 per cent. For this week we estimate the ratio at around 64 per cent, which is similar to what we saw a year ago. But at a significantly higher price.

The low beef prices in the fall of 2016 provided retailers an opportunity to book beef features for after the holidays. This limited the supply of product trading in the opening market later that year (see 2016 ratio for Dec above) and helped support prices. Beef prices have increased sharply recently, however, and it remains to be seen how this will impact retail features post year-end holidays.

The situation in the pork market is similar. Robust pork export business and strong domestic demand have kept the flow moving. The only times when spot availability increased was in late July and September, periods when product prices came under pressure.

The ratio of pork spot loads vs. slaughter remains under year ago levels helping underpin the pork cutout. Pork packers may be slaughtering more hogs, but the this has not (at least not yet) pushed more pork in the open market.

TheCattleSite News Desk

Top image via Shutterstock

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