The price of red meat at the grocery store has risen on the back of surging cattle and hog prices, and while prices will not drop in time for this BBQ season, consumers should begin to see some relief later this year, according to a new report from BMO Economics.
"Farm prices for hogs averaged US$85/cwt between April and June, up nearly 24 per cent 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 per cent higher than last year. After adjusting for inflation, 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."
Supply Management
Mr. Goertzen noted that a peculiarity of the livestock industry is that in order to expand supply, producers must first restrict supply to allow for animal breeding. "Much of the run-up in cattle prices has resulted from this herd rebuilding dynamic. Meanwhile, hog herd expansion has been hurt by the emergence of the PED virus last year, which is now estimated to have killed around seven million piglets.
"All of this has resulted in substantially higher red meat prices at the supermarket," concluded Mr. Goertzen. "In the United States, the consumer prices of beef and pork were up 10.4 per cent and 12.0 per cent year-over-year in June, respectively, dwarfing overall food inflation of 2.4 per cent. Consumers are not alone; food processors, grocery stores, and the restaurant services industry have all have seen margins come under pressure as wholesale meat prices have risen. Hog and cattle farmers, 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. "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."
Canadian Prices Up Sharply
Mr. Goertzen noted that red meat prices have risen more sharply in Canada compared to the U.S., with pork prices up 16.6 per cent year over year and beef prices up 12.8 per cent year over year in June. Overall food prices were up just 2.9 per cent year over year. The 5 per cent year over year depreciation of the Canadian dollar in June is likely the main reason for larger price increases in Canada.
"Rising red meat prices will likely cost the average Canadian household more than $100 per year," Mr. Goertzen added.
"The livestock and red meat sectors are key economic drivers in the Canadian economy," said Andrew Bowman, National Director, Agriculture, BMO Bank of Montreal. "This period of profitability will allow farmers to invest in their businesses with purchases of new equipment and facilities. This reinvestment will drive growth in not only the Canadian red meat industry, but also in rural communities coast-to-coast."
Price Relief
The report states that price relief through an upswing in supply has not arrived yet, but it is coming. "In the hog space, we expect a rebound in slaughter activity in late 2014," stated Mr. Goertzen. "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. 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, supply is unlikely to loosen materially until late 2015 at the earliest."
The full report can be downloaded at: www.bmocm.com/economics.
About BMO Financial Group
Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified financial services organization based in North America. The bank offers a broad range of retail banking, wealth management and investment banking products and services to more than 12 million customers. BMO Financial Group had total assets of $582 billion and more than 45,500 employees at April 30, 2014.
Source: BMO Financial Group