Why hasn't the price of meat gone up?
On an earlier post someone asked: Why, with commodity prices so high, hasn't the price of meat gone up?
I have two basic answers.
1) Meat, especially if we're talking about meat you buy in the grocery store, is ultimately derived from commodities like corn and soybeans, which are the primary source of animal feed. But there are a lot of steps involved with raising the animals and processing and marketing them. So the price of meat, like most everything else we buy, is mostly made up of labor costs along that chain, not the price of the raw material inputs. This is why we here in rich countries hardly perceive the effects of rising commodity prices (except maybe for gas), but folks in places like Egypt who are living on $2 day can feel the higher price of wheat in a way we just cannot comprehend.
2) There can be a long lag between the time when corn and soybean prices rise and meat prices rise. In fact, in the short run, meat prices can fall because meat producers, squeezed by higher input costs, are forced to liquidate their inventories. That is, take their breeding stock to the slaughterhouse. Thus, in the short run prices may fall as the market is flooded. But in the longer run, with a smaller breeding stock, the supply of meat shifts in, ultimately driving up meat prices. The opposite can happen when commodity prices fall, since meat producers must reduce supply in the short run in order to increase breeding stock and supply in the long run. The key issue here is that animals are both a consumption good and capital, which can give rise to cattle cycles.
Update: I don't follow meat markets as much, but I just took a gander and noticed that while live animal prices haven't gone up as much as other commodities, they are up. But frozen pork bellies are up a lot. What's the difference? Frozen pork bellies, like basic grains, are storable, which allows anticipated higher future prices to be realized right here and now.
I have two basic answers.
1) Meat, especially if we're talking about meat you buy in the grocery store, is ultimately derived from commodities like corn and soybeans, which are the primary source of animal feed. But there are a lot of steps involved with raising the animals and processing and marketing them. So the price of meat, like most everything else we buy, is mostly made up of labor costs along that chain, not the price of the raw material inputs. This is why we here in rich countries hardly perceive the effects of rising commodity prices (except maybe for gas), but folks in places like Egypt who are living on $2 day can feel the higher price of wheat in a way we just cannot comprehend.
2) There can be a long lag between the time when corn and soybean prices rise and meat prices rise. In fact, in the short run, meat prices can fall because meat producers, squeezed by higher input costs, are forced to liquidate their inventories. That is, take their breeding stock to the slaughterhouse. Thus, in the short run prices may fall as the market is flooded. But in the longer run, with a smaller breeding stock, the supply of meat shifts in, ultimately driving up meat prices. The opposite can happen when commodity prices fall, since meat producers must reduce supply in the short run in order to increase breeding stock and supply in the long run. The key issue here is that animals are both a consumption good and capital, which can give rise to cattle cycles.
Update: I don't follow meat markets as much, but I just took a gander and noticed that while live animal prices haven't gone up as much as other commodities, they are up. But frozen pork bellies are up a lot. What's the difference? Frozen pork bellies, like basic grains, are storable, which allows anticipated higher future prices to be realized right here and now.
Hard to speak to someone's experience at their local grocery store, but according to IndexMundi beef and salmon are both up 30-40% since Dec 2009, and higher than they ever were in 2008. Pork was comparably high and has since come down, while chicken is flatter.
ReplyDeleteGreat point on the storability of pork bellies (and the pricing implication).
Professor I find that I agree with you in a stumbling fashion. What is tripping me up are the following points:
ReplyDelete1. From your original post you believe that the rise in commodities was a result of increased consumer demand. However, this evolving demand to eat more from prospering nations should include meat. Also, when you consider that these newly populated developing cities are filing with people who now have the increasing ability satisfy their previously deficient protein needs I would have though meat would have risen along with if not ahead of other commodities, and not lag it. That is from the demand prespective.
From the supply side livestock farmers are price takers when it comes to buying grains. However, they are also price takers when in comes to the price they receive for their produce, too: they are, for want of a better phrase the economic slaves in this system. The higher prices they are receiving now, to me, represent the crums/offal that the factory throw back to them to keep them in business. This is in responce to the feedback loop that is a feature of the market, however I would suggest it's limited as farmers have little economic power - relatively speaking. They are not in a position to pass on their costs, although in an acknowledgement of the higher imput costs factories/processors/supermarkets hand back a price rise. As an aside, feed costs represent 65% of livestock cost of production. Labour circa 15%.
I agree with your analysis in paragraph 2 and I fear that this is what may be happening now in some parts of the world at least. From what I am hearing, the Foot and Mouth outbreak in South Korea is a factor in higher prices for hog farmers in North America.
The outlook for the future is brighter than the present, I just hope that folks that are living in these hard times have the will and capacity to be there as and when the fat years arrive again.
Finally, I will leave you wondering: is the storage point on pork bellies consistant with the the belief that inventory can signal a speculation in this market?
Anonymous:
ReplyDeleteI agree with some of what you're saying here. But what you don't seem to grasp is that while commodities are a key part of meat production, and demand for meat is driving up commodity prices, the retail price of meat is made up only partially of commodities.
Suppose 25% of the retail price of meat is the embodied feed grain commodities (I'd guess it's a lot less than this, but I'm not sure), and commodity prices double, but other components of the retail meat price (mainly labor) do not change. Then the price of meat will only go up 12.5% when the feed grain commodities go up 100%.
That's the point with 1.
Also note that all my analysis here assumes price taking competitive behavior. But while meat producers are in fact competitive, the processors (Tysons, etc.) have a lot of market power and are going to be the ones setting meat quantity. Market power is, in fact, another reason why we might see less variation in retail meat prices than we see for commodity prices, which are truly competitive.
Finally, I think it's naive to think the price pass-through wouldn't be instantaneous, at from an information standpoint. The meat production dynamics I described in (2) are important only for large live animals. And since the growing cycle is much shorter these days than it used to be, probably a smaller deal than it once was.
I think we may be kicking at different goal posts here Mr Roberts.
ReplyDeleteI realise better now where you are coming from when you are talking about meat price and by that you are refering to the retail price. I on the other hand, have been talking about the return to the farmer. Meat demand, and here what I have in mind in particular is demand for pork as that is what I am based in, has not (yet) deviated away from it's usual seasonal trend - on this side of the pond at least.
I am still of the opinion that if consumer demand was, and is, one of the main drivers in the rise in food that meat demand would have been included in that demand.
If the demand is genuine surely the producer's product would be in more demand and thus the producer's price would rise, too.
Moreover, the speed of the rise is conspicuous. More akin to fast money than fast economic growth I would have thought but I am open to correction.
I take your point on price-pass through just in case you think your flogging a dead horse.