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Beef's wide price premium to pork could lead to volatile market

By Curt Thacker

.

Of DOW JONES NEWSWIRES

KANSAS CITY (Dow Jones)--U.S. wholesale beef prices last week reached 3
1/2-year highs and hold near-record wide premiums to pork, which could lead to
increased volatility for both sectors in the coming weeks.

Some analysts, meat brokers and livestock market managers predict the wide
differences in beef and pork prices could result in a corrective move on the
part of both categories to return the relationship to one that is more in line
with historical norms. However, there is uncertainty about when and to what
degree the adjustments could occur.

The U.S. Department of Agriculture quoted the choice-grade beef carcass
composite value Thursday afternoon at $172.47 per hundredweight. That was up
$31.47, or 22.3%, from a year ago and the highest since late October 2003.
Choice beef prices on Friday fell $2.80 to $169.67.

Wholesale pork prices are up from a year ago as well but not as much as beef.
USDA quoted the pork carcass value Friday at $68.16, compared with $59.73 a
year ago.

The spread, or difference, between the choice-grade beef quote and the pork
carcass value on Thursday was $106.04 and as of Friday afternoon was $101.51.

The beef-to-pork ratio, which is the beef value divided by the pork quote,
Friday was 2.49.

The spread and ratio are comparisons used by some analysts and meat traders
to keep track of price differences between the two meat categories and for
forecasting wholesale movement and demand.

Ron Plain, agricultural economist at the University of Missouri, said the
spread and ratio are close to their respective records. There have been two
months when the choice beef-pork cutout spread averaged more than $100 per
hundredweight, he said. These were October 2003, when the spread averaged
$117.19, and November 2003 at $110.65. Those two months also were when the
record choice beef/pork cutout price ratio were set, at 2.96 in October 2003
and 2.98 in November 2003, he said.

Wholesale beef prices were extremely strong in the second half of 2003 after
Canada discovered a case of bovine spongiform encephalopathy, or mad-cow
disease, in May of that year. The U.S. immediately banned cattle and beef
imports from Canada, which reduced supplies while exports of U.S. beef were
very strong until late December of that year when a BSE case was found in
Washington state. That finding caused most of the nation's trading partners to
ban U.S. beef imports, and prices declined.

The situation is different now, Plain said. The tough winter, lighter carcass
weights, much higher corn prices and smaller calf crops the past two years have
resulted in smaller beef supplies than had been expected, Plain said.

"The supply situation could get even tighter next month," he said, and that
could keep beef prices at or near the current levels. However, the beef/pork
spread should narrow somewhat because hog and pork prices are expected to move
up seasonally into the summer.

"It looks like steers will average close to $100 (live) this month, so the
choice carcass price should stay high enough we could keep the $100 spread,"
Plain said. He also predicts the pork cutout could rally into the $70s before
the end of the month and keep the spread from widening even more.

Dan Vaught, analyst with A.G. Edwards and Sons in St. Louis, said another
facet of the comparison could be the underlying shifts in demand for the
various cuts.

Steaks and roasts still make up the majority of the beef cutout, while
hamburger is a big seller but doesn't have much effect on beef carcass prices.
The big shift, Vaught said, has occurred in pork grilling products and in the
demand for bacon. However, he said the hog industry has been hurt by the
diminishing demand for pork loin, which is the most valuable pork cut. In that
sense, it is not surprising that the pork cutout has lost ground to beef over
time, he said. This may be the result of the switch to leaner animals, which
has led to less marbling, or intramuscular fat, in the chops and has reduced
consumer satisfaction.

Vaught also said some retail meat buyers may have been surprised by the
strong upturn in beef prices. They are paying sharply higher prices now after
buying mainly on a "hand-to-mouth" basis for so long and "messed up" by not
being much more aggressive when wholesale prices were sliding during late
March, he said.

Bob Wilson, analyst with HedgersEgde.com in Denver, Colo., said the wide
spread "will certainly have an impact in setting extended retail features for
post-May."

He said regardless of the price and their disposition, retailers will
grudgingly buy beef for May and the Memorial Day holiday. "They will protest
and complain and claim they won't buy any beef ... and then they do."

Consumers want to get past winter and into the summer, and they use grilling
beef as a rite of passage and as comfort food, Wilson said. However, once they
are initially satisfied, the price can impact their purchasing decisions.

-By Curt Thacker; Dow Jones Newswires; 913-322-5178;
curt.thacker@dowjones.com

(END) Dow Jones Newswires

04-16-07 0846ET

Copyright (c) 2007 Dow Jones & Company, Inc

By Curt Thacker .

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