US pork prices rise by 35%

US data show that hog prices were nearly 35% higher against on-year on 6% lower hog slaughter and 5.8% lower pork production.

 

That implies a very inelastic demand curve - much as the demand we dealt with in 1995-2006. The rule of thumb is a 1% change in hog supply would drive a 2-3% change in hog price in the opposite direction.

 

But the world changed in the mid 1990s. First, hog demand became much more inelastic; meaning that given changes in output had much larger impacts on prices. We know of no one who has conclusively determined why this change occurred but it coincides with the completion of the rationalisation of excess slaughter capacity in the pork industry, implying that the sector had far less flexibility to handle extra hogs, thus exaggerating the impact of higher supplies on prices.

 

The remaining large plants needed higher capacity utilisation rates in order to drive unit costs lower. The need for sufficient supplies almost certainly drove slaughter firms to chase hogs when supplies were short, thus exaggerating price movements on high side as well. The late 1990s brought a huge amount of variability in the price: quantity relationship as quarterly hog demand was apparently very, very erratic.

 

In fact, from Q4 2003 through Q1 2010, over half of the implied flexibility observations did not even have the correct sign. They were positive instead of negative, indicating either higher prices and higher supplies or lower prices and lower supplies - something that cannot happen with a relatively stable demand curve for a normal good.

 

The past two years have brought us back to a bit of normality at least from a historical perspective. But April data will almost surely show larger price flexibility and the May data cited above say we might be back to the 1995-2006 situation, hopefully without the huge amount of variability.