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

Agriculture.com Staff 02/08/2016 @ 12:06am

By Curt Thacker .


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.

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