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It May Be 2015 Before Retail Beef Prices Come Back Down

It May Be 2015 Before Retail Beef Prices Come Back Down
Economic firm expects pork prices to fall later this year; beef prices likely to drop in late 2015

Rising cattle and hog prices have driven retail meat prices higher recently, and while that's not expected to change quickly, pork prices may come down yet this year while beef prices could take until 2015 to cool.

"Farm prices for hogs averaged $85/cwt between April and June, up nearly 24% from the same period last year," said Aaron Goertzen, Economist, BMO Capital Markets. "Meanwhile, cattle prices averaged $146/cwt during the same period, nearly 18% higher than last year."

After adjusting for inflation, Goertzen says, hog prices are now at their highest since the mid-1990s, while real cattle prices are higher than they've been since the early 1980s.

Economic firm expects pork prices to fall later this year; beef prices likely to drop in late 2015

Goertzen said part of the reason for the supply constraint is that producers are retaining breeding herds instead of sending females to slaughter. "Much of the run-up in cattle prices has resulted from this herd rebuilding dynamic," he says.

Related: Ag Baselines: Grain Prices To Stay Low, Cattle Prices High

Meanwhile, hog herd expansion has been hurt by the emergence of the porcine epidemic diarrhea virus last year, which is now estimated to have killed around seven million piglets.

In the U.S., the consumer prices of beef and pork were up 10.4% and 12% year-over-year in June, respectively, dwarfing overall food inflation of 2.4%.

Food processors, grocery stores, and the restaurant services industry, along with consumers, have all have seen margins come under pressure on rising wholesale meat prices.

Hog and beef producers, on the other hand, are enjoying a much-needed renewal in profitability after several extremely tough years.

"The recent increase in red meat prices, while less encouraging news for consumers at the checkout, has brought many farmers in the industry a welcome boost to their business," said Sam Miller, managing director and head of agriculture, BMO Harris Bank.

Related: Many Causes for Skyrocketing Cattle Prices in 2014

"Activity this summer has alleviated some of the lingering negative impact after dry conditions in the Plains earlier this year threatened livestock and crop supplies, with disease continuing to have an impact on pork producers and pushing up prices," Miller says.

Relief in sight?
Price relief through an upswing in supply has not arrived yet, but it is coming, BMO says.

In the hog space, the firm expects a rebound in slaughter activity in late 2014. The increase in supply should put steady downward pressure on prices over the second half of 2014, as will fading seasonal demand.

"Consumer pork prices should follow suit, though perhaps with a bit of a lag," Goertzen advises.

In contrast, cattle and beef prices will remain higher for longer, mainly because of the industry's lengthy production cycle.

Assuming that cattle producers began to step up breeding around the turn of the year, Goertzen estimates that supply is unlikely to loosen materially until late 2015, at the earliest.

For the latest beef market news and livestock market news, check out John Otte's daily column, Livestock Call, on Farm Futures.

Source: BMO Financial Group

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