Inflation is pushing the demand for protein down, but a collapse in current prices is still unlikely.
Headline inflation, which is typically viewed through the lens of the Bureau of Labor Statistics’ Consumer Price Index (CPI), rose at an annualized rate of nearly 7% at the end of 2021. The CPI increased almost 5% in 2020 and 2021, the greatest increase since the early 1980s.
The pandemic’s disruptive impacts on supply chains are well-documented. Disruptions in the protein space are interpreted by many as shortages.
In economic terms, a shortage exists when the quantity demanded exceeds the quantity supplied, but the term is misleading because it evokes images of “scarcity” to the average person.
One is hard-pressed to make a case that U.S. protein supplies are scarce when the combined domestic per capita availability of beef, pork, chicken and turkey were at record highs in 2020. Availability declined by less than 1% from an all-time high in 2021. This suggests inflation in protein markets is driven by shifting demand-side forces.
Consumer behavior was altered by the pandemic. Food became one of the few areas of the economy where spending faced minimal restrictions. Stimulus and other government payments provided consumers with more cash to spend on groceries and restaurants. Protein products became a key source of indulgence for many people as events unfolded.
This trend may finally reverse as retail food prices soar and consumers face inflationary pressures in other areas. Stimulus efforts also waned. In 2022, Americans will have fewer dollars available to spend on food but pay higher prices for it.
Wholesale protein markets were exceptionally strong in 2021. Beef and chicken set records on a composite, cutout basis. Pork and turkey prices came up short of records established in 2014-15 as a result of disease-related supply disruptions.
Higher prices are working their way up the value chain to consumers. Early indications suggest an expected negative response from consumers, but it is premature to suggest it will translate into weaker wholesale prices in 2022.
While consumer demand for protein products is lessening, liquidation by cattle and hog producers points to shrinking beef and pork outputs this year. This is expected to reduce total protein supplies.
Protein supplies may not shrink enough to overcome weakening demand and keep prices from declining, but an outright collapse in prices appears highly unlikely in this scenario.