The New York Times
January 7, 1999
The Great Pork Gap: Hog Prices Have Plummeted. Why Haven't Store Prices?
By DAVID BARBOZA
PARK RIDGE, Ill. -- Inside a giant Dominick's Supermarket here, Sam Ventura was buying some high-grade pork chops.
At $3.99 a pound, Ventura was not fretting. "This isn't a steal, but the price is fine," he said, unloading a cart of groceries at the checkout counter as his five-year-old son, Vinnie, looked on. "We eat pork every week, and you never hear bad things about it -- none of that mad-cow stuff."
But to Rick Dean, a hog farmer in Leroy, Ill., two-and-a-half hours south of this Chicago suburb, the price was a disgrace. While the pork products from one of his hogs yields about $304 at the supermarket, he was paid just $29 apiece when he took his hogs to market a few weeks ago -- down from about $110 a year ago. "We've got a lot of financial stress," said Dean, a third-generation hog farmer. "It's pretty discouraging."
What is happening to all that money? Federal officials are looking into that question after hog farmers around the nation complained that something unusual was going on, something unfair -- perhaps even illegal.
For more than six months, a glut in the number of hogs being raised sent hog prices plummeting to Depression-era lows. Yet the price of pork at the meat counter has barely budged.
So while much of the nation is splurging on pork chops, ham and bacon, allegations of price-gouging are being leveled against the meatpackers who turn hogs into pork products, and to a lesser extent against the giant supermarket chains that sell them.
"We're very concerned about the prices producers are getting paid," said Cynthia Cunningham, a spokeswoman at the National Pork Producers Council in Des Moines. "Something isn't right."
Meatpackers and retailers counter that government figures fail to reflect a significant drop in prices because they do not measure the amount of pork sold at a discount.
"Almost everything we sell moves at a special price," said Tim Hammonds, president of the Food Marketing Institute in Washington, a trade group that represents some of the nation's largest grocery chains. "Retailers are aggressively featuring pork."
They also argue, with the support of many economists, that the traditional market forces of supply and demand largely explain why hog prices have plunged even though the price of pork has not fallen anywhere near as much.
Prices for live hogs have bounced off their lows in recent days, with prices reaching 19 cents a pound on Tuesday, according to the Department of Agriculture -- up from a low of 10 cents a pound in December.
It is no surprise that the farmers' crisis has caught Washington's eye. Federal officials acknowledge that some pricing data could be faulty, but they are also concerned about the growing gap between hog prices at the farm level, which are down 65 percent, and pork prices at the retail level which are down just 2 to 3 percent -- a spread that economists say is one of the widest on record.
Agriculture Secretary Dan Glickman has asked the Justice Department and the Federal Trade Commission to look into possible price-fixing or anticompetitive pricing by meatpackers.
The National Farmers Union is urging federal officials to investigate competition in the pork industry, where 75 percent of the packing is controlled by just six companies -- Smithfield, IBP, Swift, Excel, Farmland and Hormel Foods.
Several large meatpackers say that they have cut prices about 30 percent from a year ago, and that they are working overtime to slaughter and process a record number of hogs, more than 2 million a week -- 10 percent more than a year ago.
"There are hogs everywhere," says Jens Knutson, a spokesman for the American Meat Institute in Washington, which represents meatpackers. "The prices are really what is necessary to clear the market; these are market forces at work."
Because of that glut, meatpackers are bidding down the prices when farmers call to say they want to deliver a truckload of pigs. Some farmers say they no longer shop around; they ask if and when a packer will take delivery. This gives packers tremendous leverage -- leverage that industry officials say may be battering farmers and enriching packers.
Several big meatpackers acknowledge that, for them, these are good times. "There's no question packers are making good money," said Gary Mickelson, a spokesman at IBP in Dakota City, Neb., one of the nation's largest meatpackers. "But ultimately it's the law of supply and demand."
As a result, after two years of losses, IBP has been posting record profits, up more than 125 percent in the third quarter of 1998, and its shares jumped more than 37 percent in 1998. Hormel, the large meat processor based in Austin, Minn., also reported record profits of nearly $140 million in 1998.
Pure greed is hardly the issue, though. Economists say that a more complicated set of factors is at work.
"The probability of collusion or anything like it is near zero," said Glenn Grimes, a professor of agricultural economy at the University of Missouri at Columbia. "I just think the American people aren't that price-conscious."
One reason retail prices have not fallen sharply, economists say, is that soaring demand for pork means retailers are under less pressure to lower prices. But that is only part of the answer.
Much of the dispute can be traced to the data. According to the Agriculture Department, the price of live hogs -- which the farmer sells to the meatpacker -- has fallen as much as 65 percent from a year ago. The wholesale prices that the meatpackers get for their pork products, though, is down 30 percent. The retail price of pork (an average of several products: ham, pork chops, sausage, bacon and pork roast) is down just 2 to 3 percent from a year ago, at $2.26 a pound.
Retailers said that the grocery-store data fail to reflect that most pork is sold at discount. Pork prices, they said, are down 13 to 19 percent from a year ago. Even so, the dropoff is nowhere near the plunge in farm prices.
Economists noted that farm and retail prices don't usually move in lockstep, because the cost of the raw commodity is only one component in the cost of delivering meat to consumers. But -- even if the retailers' figures are correct -- economists also said that the spread between the two does not usually bulge as large as it has been.
"There is reason to be concerned that retail prices are not behaving as they have in the past," said John Lawrence, a professor of agricultural economics at Iowa State University. "There's usually a two- to four-month lag in the change in prices. But it's been over a year now and it's still not following."
Agriculture Department officials acknowledged that their data are incomplete, possibly even flawed. But economists said that data for 1994 -- when farm prices also declined sharply -- show that the spread between retail and farm-level prices was far narrower, and the two sets of prices moved more in tandem than now.
What really bothers hog farmers -- even those who say that their production boom sparked this crisis -- is the way revenue has been divided.
In recent years, retailers received about 47 cents for every dollar of pork sold, while meatpackers took in 16 cents and hog farmers, who were enjoying hefty profits, 37 cents. But now, with live hog prices down from about 35 cents a pound a year ago to about 11 cents today, those percentages have been turned on their head.
Retailers now get about 60 cents of that dollar, meatpackers 22 cents and hog farmers just 18 cents, according to the Agriculture Department.
Retailers dispute any suggestion of price-gouging. "We don't see anyone taking excess profits," said Hammonds of the Food Marketing Institute. "And the exercise in finger-pointing is not the way to solve the problem. We are conscious of what pork producers are going through. And we're trying to move pork.
"We are saying to consumers: 'add ham and pork."'
When retailers met not long ago with Glickman, the Agriculture Secretary, they brought a large supply of grocery-store circulars promoting pork specials.
It's the same at many stores. At a Hyvee Foods supermarket in Iowa, for example, the meat section was plastered during the Christmas weekend with hand-written signs urging shoppers to "Try Our New, Low, Low, Low Pork Prices!"
Nearby, a Fareway's supermarket initiated "Operation Pork," offering pork loins with bones for 69 cents a pound.
But some shoppers here in the Midwest -- where hog farms are integral to the economy -- have begun to ask why the price of pork hasn't fallen as sharply as, say, the price of gas, which is now as little as 80 cents a gallon.
"None of us understand why they haven't lowered their price even more," said Jan Kline, who was shopping with her family at a Cubs Food outlet in Ames, Iowa, shortly after Christmas. "I guess they're just keeping the price up to make a profit."
John McMillin, a food-industry analyst at Prudential Securities, said prices may fall now that the holiday rush is over. But he also said supermarkets have every right to profit in good times, because they suffer when the meat or dairy or poultry equation turns against them.
"The hog growers of America have made inordinately high returns for several years," he said. "One reason there are so many hogs right now is that returns have been so high."
Another reason retailers have not been cutting prices more aggressively, McMillin said, is that consumers dislike price volatility, particularly in the meat aisle.
Still, the pork industry finds itself in a quandary. While officials would like to see lower prices help sell more pork -- and thus eliminate it from the supply chain -- pork consumption is soaring even at high prices.
If pork industry officials press too hard for lower prices, some economists say, it could move the supply faster, but consumers could also get used to cheap pork -- pork that is less profitable for farmers and retailers.
So industry officials have been careful about attacking the retailers who are helping push pork consumption to record levels.
"We want people to buy pork because they like it and because it's a good value," said John Hargerla at the National Pork Producers Council. "We don't want to be the cheapest meat on the block."