Personal Wealth Management / Market Analysis

A Supply-Side of Bacon

Due to this summer’s drought’s decreasing corn and soy crops, costs of pig feed are rising and the numbers of pigs across Europe are declining. Could this change fried eggs and Cobb salads as we know them?

Hold on to your hamstrings, folks—according to several news sources, we’re facing a bacon shortage. In the last year, numbers of sows in pig herds fell across Europe, from -1.3% in Germany to -13% in Italy. Yet in my view, organizing a “Save Our Bacon!” campaign is likely unnecessary due to some pretty basic tenets of capitalism.

News of a possible bacon shortage spread like wildfire after the UK’s National Pig Association’s (NPA) 09/20/2012 press release. The decline in sow herds is credited to higher prices and a smaller supply of soy (a large component of pig feed). Less food begets fewer pigs, and fewer pigs means ... uh oh, less bacon. Less bacon, not necessarily no more bacon as some sources seemingly tout. And, very likely, higher bacon prices for the time being.

The NPA suggested how to protect pork production: Namely, supermarkets should pay farmers more for pork products to counteract losses, thereby protecting consumers from a bacon shortage and higher prices in the year(s) to come. Well, yes. Prices are likely to rise in the period ahead. But not because an industry advocate group recommends artificially influencing prices, but because of a basic lesson of economics: supply and demand.

Some will interpret potentially increased bacon prices as purely a negative. Not me. You see, the reality is while higher prices can strain some folks in the short run, they serve a defined purpose. To the extent the rise is the natural product of supply of and demand for pork, it’s just economic equilibrium—and the real reason we won’t run out of pork. In a free market, prices act as a signal. If supply shrinks, but demand stays the same, the price rises. A higher price can be a disincentive to demand and weaken it. That often brings prices lower again, eventually. It can also encourage substitution—maybe the NFL could use some other material for footballs than pigskin.

Errr—wait—that already happened, illustrating the point: Sometimes goods are quite interchangeable. And for those needs only pure pork can satisfy (bacon and eggs, bacon, bacon cheeseburgers, bacon, BLTs and bacon), the popularity of certain pork products likely keeps dedicated consumers consuming the existing supply, justifying the higher prices. Meanwhile, non-necessity substitutes may occur elsewhere in the food chain as the drought seemingly begins to ease.

In the end, the belief a true shortage can occur is based on the fallacious assumption the supply is absolutely finite while demand will remain stable, thereby preventing a supply/demand balance through price. In the very short run, perhaps that’s true. But beyond this myopic view, it’s apparent that’s very unlikely the case for pork. In fact, the NPA’s last “Save Our Bacon!” campaign illustrates the point well. In 2008, prices were supposedly too low for pig farming’s survival in Britain ... yet survive it did. My guess is it survives the currently feared shortage largely because of prices’ impacts.

Due to prices’ influence in shaping both supply and demand, I won’t be stockpiling cured meats in anticipation of “porkocalypse.” And if your piggy bank starts to feel the strain of rising bacon prices, just remember this is a real life lesson in supply and demand—we’ve simply not reached Peak Pork Product, and basic economics tells us these higher prices likely won’t last forever.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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