Cattle Economics

What is Beef Demand Doing?

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Noting the uptick in demand during recent months, while per capita supplies dwindle and retail prices increase, Jim Robb believes rather than turn away from beef, consumers are figuring out ways to stretch further their beef purchases.

If you judge beef demand by wholesale values, you likely turned a little queasy in March, thinking about those extra replacement heifers prowling the pasture.

Choice boxed beef cutout values tumbled $15.08/cwt. from the beginning to the end of March – there were only two times that prices increased day to day. Select boxed beef cutout values closed March $12.75/cwt. lower. The Choice-Select spread spent most of the month below $2. And, some of that occurred before the media mess surrounding lean finely textured beef (LFTB).

“I don’t think beef demand is as weak as boxed beef prices might suggest,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

For one thing, Peel explains the wholesale price for middle meats – the costliest cuts in the carcass – continue to sell for more than the previous year.

“If there was a major demand issue, the price of all carcass primals would be declining,” says Glynn Tonsor, Kansas State University agricultural economist.

Peel also points to the Restaurant Performance Index – a proxy for restaurant sales and optimism for the next few months – which continues to gain ground since the recent recession took hold.

Plus, Peel explains in-month wholesale values have become increasingly volatile. With record-high prices, he sees less forward pricing taking place. As buyers rely more on the spot market, volatility increases.

Tonsor believes the quarterly Beef Demand Index (BDI) will show a decline in the first quarter of this year. But, he points out, that same index increased for the previous six consecutive quarters.

If the BDI is lower, Tonsor figures it’s due to a combination of factors, including macroeconomics like rising gas prices, as well as fundamentals like unseasonably high carcass weights adding to tonnage.

“At these prices, consumers are careful buyers,” says Jim Robb, director of the Livestock Marketing Information Center. “For the last two years, we’ve expected some consumers to trade away from beef, but it hasn’t happened yet.”

Noting the uptick in demand during recent months, while per capita supplies dwindle and retail prices increase, Robb believes rather than turn away from beef, consumers are figuring out ways to stretch further their beef purchases.

All this is compounded, at least in the short term, by consumer confusion surrounding LFTB (see “Slimed” on page 16) and the subsequent industry adjustments to a void of lean beef trimmings for hamburger.

By the end of March, some economic fallout was already apparent: higher prices for high-percentage lean trimmings; significantly lower prices for lower-percentage lean trimmings, especially the less than 50% lean trimmings that have gone into LFTB; and lower drop value based in part on increased tallow production from more of those latter trimmings going toward rendering.

Up to that point, Tonsor says there was no indication that consumer concerns about ground beef containing LFTB had spilled over to beef in general. Previously, Tonsor has researched demand effects associated with beef recalls. Note that LFTB is not a beef safety issue, a nutrition issue or any other fact-based issue. It’s one of consumer confusion, based on erroneous media reporting. With that said, Tonsor says the negative price impact following beef recalls typically lingers 3-6 months.

Even when LFTB fades from the news, if LFTB is no longer used prevalently, ground beef prices will remain at elevated levels. This could add to beef demand already challenged by historically high prices overall.

More important, Tonsor says LFTB serves as another glaring reminder that consumers want to know more about their food. That means the need continues to grow for the industry to share the facts with consumers.

All told, Tonsor says, “I don’t think the bottom has dropped out of demand.  I think there has just been a pause in the market bullishness.” 

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Wes Ishmael provides tightly focused analysis and commentary on specific beef quality and marketing issues of practical importance to beef producers.

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Wes Ishmael

Among the industry’s most insightful thinkers, Wes Ishmael concentrates on industry price and market perspectives for BEEF magazine. Along with his monthly “Cattle Economics” column...

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