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CME: Dramatic Shortfalls in Red Meat, Poultry Production

30 April 2014

US - The latest USDA monthly production statistics offer a glimpse of the supply dynamics in the US meat protein market during the first three months of 2014, write Steve Meyer and Len Steiner.

The dramatic shortfalls in production (especially in the case of beef) help explain some (not all) the price inflation so far this year. We think the charts below give a good illustration not just of what has happened this year, which is a significant supply contraction. Rather, they show that meat production in the US has been constrained for a number of years.

The initial response from market participants was to find ways to minimize/hide the impact of smaller supplies and higher prices. This was likely done through changes in portion size, changes to the product mix to include less expensive products and also likely smaller margins for all along the supply chain.

At some point end users run out of maneuvering room and significantly higher prices are required to reflect the changes in supply conditions. Add to this the improvement in consumer balance sheets, which tend to have a wealth effect on overall meat consumption. Below are some of the key statistics from the latest USDA production number for May:

Total cattle slaughter for March at 2.450 million head was 5.3 per cent lower than a year ago. In all of the first quarter, cattle slaughter was down 5.2 per cent. Please note that we use average daily numbers in the charts to eliminate the effect of differences in slaughter days from the y/y comparison.

The following chart to the right shows an interesting fact. We saw a similar drop in slaughter during late 2011 and early 2012. However, the impact on production was not as significant as heavier weights offset the decline in slaughter. This year, however, weight gains have been quite small and total beef production in March was down 5 per cent and it was down 4.9 per cent for all of Q1.

Average daily steer slaughter in Q1 was 2.7 per cent from a year ago while average daily heifer slaughter was down 7 per cent and daily cow slaughter declined 8.7 per cent. The reduction in female cattle slaughter accounts for two thirds of the decline in beef output in Q1, which makes sense given the decline in feed costs, improvement in profit outlook for cow-calf operators and the need to rebuild the herd.

Commercial hog slaughter in March was 8.674 million head, down 6.9 per cent from a year ago. This was the biggest decline in monthly hog slaughter since July 2010. While the decline in slaughter was big, heavier hog carcass weights helped offset some of the reduction, with pork production pegged down 4 per cent compared to a year ago.

Pork prices have skyrocketed but not all the increase has been due to smaller pork supplies. Rather, smaller beef supplies and only modest increases in broiler production have caused end users to pay significantly higher prices for pork products. Sow slaughter in March was down 6.5 per cent and daily slaughter in Q1 averaged 5.6 per cent below year ago levels.


Daily Livestock Report - Copyright © 2008 CME. All rights reserved.


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