Pass-through is the economic term for how higher (or lower) prices in a chain wind up effecting prices up-chain, say at retail. All outcomes are possible for a price rise such as we have experienced in the corn market due to the government transfer payments for corn producers. Input price increases can lead to complete pass through up chain, more than complete pass through or something less than complete pass through.
Part of the problem in the meat case at retail is there is so much special pricing, loss leader pricing and the like that it is hard to tell exactly what happens for every input price change down the chain. In addition, price changes at retail for products made from agricultural products tend to be very small compared to the change at the production level. This is due in part to all of the value added as the chain progresses (i.e., a few cents worth of wheat in a $4.00 box of wheat breakfast cereal.) Small changes are sometimes unnoticed by consumers as they are lost in the noise of other price changes, the hassles of shopping and plain inattention.
Brian Buhr of the University of Minnesota has estimated the pass through in pork prices likely from the increase in corn and bean prices (he used about $3.45 corn, $167 Bean Meal). Brian has a little model that takes into account the changes in the poultry and beef sectors at the same time and their feedback impacts on the pork sector etc.
By his estimates, variable costs for the typical pork producer will rise about 14% (total cost of production about 12.5%). When the dust settles, his model predicts pork prices offered by the packer will have risen about 9.3% (from a previous average of $61.01 in the carcass to a new equilibrium average of $66.70). The model is simulated a large number of times with values drawn from price distributions and this result is the mean (highest probability) expected increase from all the runs of the model.
There are a lot of things that have to happen to get that result and it is only achieved over time as market forces work their way through the system. Keep in mind that like all economic forecasts, this one is “all things being equal” which they never are. Random events of all sorts will conspire to both raise and lower prices and interfere with these forecasts but what the heck…if you must forecast, forecast often.
