Less Supply for Languishing Demand

     As demand continues to languish, Smithfield plants in the midwest and Tyson slowed kills as a means to boost prices at the wholesale level.  The strategy appears to have worked as the LS500 (Carcass Composite) price picked up over $10/cwt in the last 10 days but live prices remained stuck in the mid to upper $50 range. 

     USDA reports year-to-date slaughter down a little over 4%, just shy of 2.6 million head.  The biggest problem remains the export markets where May results revealed exports down over 30% from a year ago.  Japan was perhaps the biggest disappointment since its demand had remained firm until the recent report where the month over month decline was just over 13% and the year over year decline over 15% in tons shipped.  China and Hong Kong are returning to 2006-2007 levels and were down dramatically since the purchase boom of last year.

     On the home front, savings in the U.S. is now close to 7% which by historical standards is very high.  The calculated savings rate in the U.S. has been close to zero for many years but the "savings" in the recently released report for May is being generated by debt reduction, which is counted as savings if it increases faster than new debt is taken on.  This of course suggests that consumer spending, which has been fueled in recent years by new debt, is not likely to fuel a robust recovery very soon.  Housing values are still declining in key areas of the U.S. which will continue to dampen demand and slow credit markets, at least at the consumer level.  There is a lot of chatter about June/July being the "low point" in the recession and the third quarter is now viewed by many economists as the first quarter of potential growth (or at least no further decline) for GDP.  Since unemployment is expected to inch up through the fourth quarter to top 10%, it is difficult to find much evidence that growth of any significant kind is in the cards for this year.  Credit card default rates are expected to climb as unemployment tops out and will bring a second or third wave of difficulty to banks and credit markets. 

     As I have alluded to in a previous column, the longer the recession runs, the more likely we will see some persistence in the spending patterns and newly acquired "tastes and preferences" of U.S. consumers.  If there is a mindset change regarding spending and what is acceptable from a consumption point of view, we may not see a robust return to spending on consumer goods and food purchases (especially branded and value added items) when the economy begins to grow again.  We seem likely to be facing a long flat period in demand for meat from U.S. consumers and if USDA forecasts are correct, it won't be completely flat, it will be tilted slightly down at least on a per-capita basis.  The meat industries in the U.S. are going to have to come to grips with that new reality.