By Chris Hurt
Getting pork to consumers requires producers, but also processors and retailers. USDA divides the retail pork price into three shares: producer, packer and retailer. In 2016, hog producers received a record-small percentage of the money spent on pork at the retail level — only 21 cents of every dollar spent by pork consumers. If producers got less, someone got more! The retail share was at a record high in 2015, and the packer share was at a record high in 2016.
There has been a long-term decrease in the producers’ share of retail dollars spent on pork. In 1990, hog producers received 41 cents of each retail pork dollar. That dropped to the record low in 2016. If hog producers received a smaller share over time, why did others in the chain get more?
The retailer was primarily the one gaining market share. This is largely explained by the growth of retail marketing services that have been expanding over past decades. Retailers were trimming more fat, deboning more and doing more processing.
In addition, grocery stores were getting bigger, with better lighting, wider aisles, better parking, shorter checkout lines and nicer displays. All these were desired by consumers, but they all cost additional money. So, the retail share increased to cover these costs over time.
Producer share vs. pork prices
There have also been wide year-to-year swings in the producers’ share (see chart below), which has important implications for 2017 and 2018 hog prices. In 2014, hog prices were at record highs due to large baby pig losses from the porcine epidemic diarrhea virus. Hog prices and wholesale pork prices shot up. Retail pork prices reached record highs.
Then in 2015 and 2016, hog prices and wholesale prices came down sharply, but retailers were slower to move retail prices down, resulting in record retail margins. The advantage for hog producers and hog prices this year is that retail prices are continuing to drop, and lower retail prices are resulting in consumers buying more pork.
The packer share was at record-high levels in 2016. High packer margins last year were related to a large supply of hogs pressing packing capacity. Typically, packer margins are high when there is a shortage of packer capacity. Packer margins started dropping in the late spring and summer of 2017, and are expected to continue dropping in the fall, as new packing capacity means there will likely be more aggressive bids for hogs.
The bottom line for 2017 and 2018 is that lower retail prices will help spur pork consumption, and new packer capacity is expected to reduce packer margins. This means the producers’ share of the retail dollar spent on pork will increase. These are also reasons why 2017 hog prices will be higher than 2016, even with increased pork supplies.
Hurt is a Purdue University Extension ag economics specialist. He writes from West Lafayette, Ind.