Where to from here for wholesale meat prices?
Source: John D. Anderson, Senior Economist, American Farm Bureau Federation
With the massive grilling event that is Memorial Day weekend in the rear view and with summer heat forcing people into the comfort of their central air, June can be kind of a touchy time for beef prices. It’s a bit early yet, but so far prices still look pretty good. Wholesale beef prices are currently well above where they were at this time last year. However, beef prices last week did seem to lose a bit of their recent momentum. The Choice cutout basically held its ground last week, with the weekly average Choice cutout working out to $197.10, up a few cents from the prior week and closing in on the high of $198.51 posted at the end of February. A big drop in end meat prices was more than offset by gains on the middle meats. Conversely, the weekly Select cutout dropped substantially, coming in at $184.47 last week – a weekly decline of $2.46. A gain in rib prices was not enough to offset substantial declines in the end meats.
At $12.15, the Choice/Select spread is as wide as it has been since the first week of the year. There is nothing unusual about a widening CH/SE spread at this time of year. The percentage of Choice cattle in the slaughter mix has been declining since early March – very much in line with normal seasonal patterns – and has now been consistently below year-ago levels for about the last month. Add to this the fact that demand for Choice meat appears to be strong and should arguably be stronger than we are accustomed to given the effect of Wal-Mart making a determined and well-publicized shift toward more Choice product. With these facts in mind, a bit wider than normal CH/SE spread is not really surprising. The question of immediate interest is whether last week’s downshift in Select prices portends a more general decline in beef prices. A number of competing factors are in play that will ultimately make that determination.
First, beef demand appears to remain strong, particularly on high-end product: the aforementioned strength on end meats and Choice product is evidence of that. Second, beef supplies will likely continue to tighten over the course of the summer. Year-to-date beef production is down by over 2 ½%. USDA forecasts show production declining even more moving into the third quarter of the year. With tighter supplies, prices will be well supported even if demand just treads water. However, other factors in the market are less supportive. Competing meat production is increasing. Pork production is expected to be up by 2.7% for the second quarter. Recently, the weekly year-over-year increase in pork production has been more like 5%. The export market has provided a home for much of this pork, but higher production could be a real challenge for pork prices this summer. As for poultry, weekly broiler production currently remains about 5% below year-ago levels; however, the pace of production appears to be picking up. Egg sets and chick placements are still running below year-ago levels, but the gap has narrowed substantially in recent weeks as integrators do not appear inclined to repeat last year’s much-sharper-than-normal summer reductions, despite weaker broiler part prices over the past month or so. Also looming on the horizon is the potential for Mexico to implement large anti-dumping duties on US leg quarters. (We’ve seen the Russian and Chinese versions of that movie before, and it doesn’t have a happy ending.) The bottom line is that competing meat prices are likely to slip relative to beef prices, making it more difficult to maintain beef prices at current levels.