Ample supplies of feed and livestock indicate that the recent volatility in some protein prices could smooth out in the months ahead.
The USDA is forecasting either deflation or minimal inflation in most fresh products other than eggs, which could remain in short supply for the next year or more as the industry attempts to recover from the late-2014/early-2015 avian influenza outbreak.
Beef and pork herds — thinned in recent years by high feed prices and disease, respectively — are rapidly being replenished and are expected to contribute a high volume of supply, buoyed by record years for feedstock production despite the drought in California.
Produce supplies also remain ample despite the California drought, as growers there have adapted with the use of wells, and supplies from other regions have expanded.
“It looks good for consumers,” said Chris Hurt, professor at the Purdue University Department of Agricultural Economics, Lafayette, Ind., in an interview with SN. “We’ve got some good news on the food side.”
A significant variable in the mix is the potential for increased demand from overseas, which could tighten domestic supplies and put upward pressure on prices. Export volume has been tempered recently, however, by the strong U.S. dollar and other factors.
Here’s the beef
Beef prices, driven higher in part due to the 2012 Midwest drought that significantly reduced feed supplies for livestock, have moderated as cattle ranchers have rebuilt their herds.
According to the USDA’s Economic Research Service, retail prices for beef are projected to increase about 5.5% to 6.5% for the full year in 2015, after rising 12% in 2014. Prices were high well into this year, with a 10.9% increase on a month-over-month basis as recently as June. In its latest pricing forecast, ERS noted, “Most retail beef prices, on average, are at record highs, even after adjusting for inflation.”
Beef inflation is expected to continue to moderate in 2016, with retail prices rising about 2.5% to 3.5%.
Kevin Good, senior market analyst at research firm CattleFax, Centennial, Colo., said he expects ample beef supplies for the next several years.
“We’ve started building the herd over the last two years, so by the time we get to 2016 we will have much bigger supplies,” he said.
SN INSIGHT
• Look for aggressive pricing on pork this year around the holidays as supplies remain plentiful and the industry pushes to move high volumes through retail. Hams were sharply priced during the summer ordering period, noted Patrick Fleming of the National Pork Board.
• Beef prices will begin to subside as the herd supply is replenished and feedstock prices remain low. This year marks the third year in a row that corn and other basic feed ingredients have had strong production, said Chris Hurt, professor at the Purdue University Department of Agricultural Economics.
• One of the “unknowns” that could impact fresh pricing is the potential return of avian influenza this fall and winter. Egg prices are expected to remain high for some time even without such a return outbreak, but they would undoubtedly be driven higher by a further reduction in layer-hen flocks. —M.H.
Consumer demand for beef has remained strong despite higher pricing, he noted, particularly in foodservice, where the economic recovery has boosted restaurant spending. Despite a decline in the volume of retail price promotions for beef, Good said retailers have still been offering some strong beef features around the holidays.
The export situation for beef remains unclear, he noted.
“It’s an unknown heading into next year, but I think you can assume the dollar will remain strong, and that causes some headwinds for exports,” he said.
Hurt of Purdue said based on recent declines in wholesale pricing, beef prices could be “very, very modestly below year-ago prices” at retail this fall.
“The year-over-year increases in beef prices we have seen in the first seven months of the year are going to slow down, or even go negative,” he said.
He said he expects beef production will increase by about 4% next year.
“We have about 2% more beef cows now, and heifer retention is up over 6%, with more mothers-to-be coming into the herd, so that’s pretty strong expansion,” Hurt said.
Plenty of pork
Similarly, pork populations were quickly rebuilt after the 2013 outbreak of porcine epidemic diarrhea virus (PEDv) devastated the pork supply. After soaring 9% in 2014, retail pork prices continue to deflate in 2015 and are expected to be down between 3% and 4% this year. The USDA projects modest inflation of 1.5% to 2.5% in 2016.
After getting through last winter without a recurrence of PEDv, the industry has stepped up biosecurity and is hopeful the disease is behind it, said Patrick Fleming, director of market intelligence and innovation at the National Pork Board.
“This year looks to be our largest in pork production ever,” he said. “We are up about 11%. That will take us well into next year.”
Retail pork prices were down about 5.4% from December 2014 through June, according to the USDA. Much of the price decline has been driven by more frequent featuring in retail promotions, Fleming said. In the second quarter of this year, featuring increased 18.5% compared with the second quarter of a year ago, according to the Pork Board.
Fleming said he expects deflationary pricing for at least the next several months.
“Pork is a very good value for both retailers and consumers, so we are encouraging retailers to promote pork more frequently, and we will have plenty of pork for them to promote,” he said.
Fleming said the industry has some aggressive campaigns planned for the year-end holidays. And hams were sharply priced on the supply side when retailers were booking orders this summer for the November-December time frame, he noted.
Consumer interest in pork products — especially pulled pork, ribs and bacon — is helping drive consumption, Fleming noted.
“Right now we are in a pretty good spot,” he said. “We have been able to promote it because we have supply, and consumers are buying it, so it’s been a pretty good year for pork.”
Egg-spensive
A significant “unknown” in the pricing outlook is the potential future impact of avian influenza, the virus that hit turkey flocks and egg-laying chickens late last year. While there have been no new cases since mid-June, the disease had been expected to subside in the summer months, said Hurt of Purdue.
The real test will come later this fall as the weather cools and migratory birds again fly south, he said. Migratory birds are thought to be the cause of the late-2014 outbreak that has caused egg prices soar more than 80% at the farm level.
The USDA predicts retail egg prices will increase about 12.5% to 13.5% this year, but will rise only 2.5% to 3.5% in 2016. That forecast assumes avian influenza will not return next year, which is by no means a safe bet, said Hurt.
“There are no approved vaccines yet, so there is concern about avian influenza,” he said. “The industry has a lot of protocols in place and is really watching closely, but I think it’s going to be difficult to feel comfortable about that one.”
Retail egg prices were up 17.8% from May to June, which was the highest month-to-month increase since 1973, according to Annemarie Kuhns, an economist at the USDA.
Maro Ibarburu, business analyst at Iowa State University’s Egg Industry Center, said avian influenza reduced the supply of layer hens by about 11.5%.
Although pullets can begin laying eggs at 18-20 weeks of age, the industry faces challenges in ramping up its supply of hens through its production facilities because the henhouses are not designed to accommodate large increases in young hens.
“Some [companies] are thinking about moving some of the pullets to the layer houses, but this depends on the height of the water and the height of the feeders,” Ibarburu explained. “If you move them too early, they might not be able to reach the water level and the feed.”
He said he estimates that it will take companies one to two years to repopulate all of their hen houses.
The industry has been increasing egg imports from Europe and Mexico, and reducing exports, both of which ease pressure on domestic pricing, although not significantly, Ibarburu said.
“It’s difficult to know how long all these price effects will last,” he said.
Hurt of Purdue noted that consumer demand for eggs tends to remain relatively stubborn despite price fluctuations.
“Eggs are relatively low cost, and consumers in general don’t change their consumption much when prices change,” he said. “It’s hard to get people to stop buying, and hard to get people to buy more by lowering prices.”
While avian influenza did not have much impact on the price of broiler chickens, turkeys were impacted, Hurt pointed out.
Turkey production was expected to be down this year, and farm prices have risen by about 8%, to $1.16 per pound, Hurt said. They are expected to fall about 1.5 cents per pound next year, reflecting increased production.
Veggie tales
The ongoing California drought appears to be having a minimal impact on the price of fruits and vegetables.
In fact, farm-level fruit prices are expected to fall 5% to 6% in 2015, and farm-level vegetable prices are expected to fall between 4% and 5%, said Kuhns of the USDA.
U.S. vegetable production has risen 5% since last year, and harvest areas have expanded, she said, adding the drought could eventually affect prices.
“If the drought continues and water supplies tighten up further, we could start to see the drought impact fruit and vegetable prices in the future,” Kuhns said.
Another factor in recent produce deflation has been an increase in import volume, thanks in part to the strong dollar, she added.
Kuhns also noted that California is a major dairy producing state, and the drought could have an impact on dairy prices. As of July, the USDA projected dairy inflation of about 1.5% to 2.5% for this year, with prices expected to rise 2% to 3% next year.
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