In the world of beef, these are the fattest of times, and the leanest, too. Consumers are demanding, and producers are churning out more Choice and Prime beef than ever before. That, while the same consumers clamor for more of the leanest ground beef in history.
That means purveyors of ground beef, especially giant, hamburger, quick-service restaurants (QSRs) like McDonald's, are scrambling to make sense of the paradox. Demand for lean ground beef is growing even as supplies of the lean trim needed to blend the product continue to decline domestically.
“Cattle cycles come and go, so we've lived through periods of abundance and scarcity before,” says John Hayes, senior director of U.S. food and packaging for McDonald's Corporation, the single largest beef buyer in the U.S. and much of the world. “This isn't about a cattle cycle. It's about a fundamental change relative to the consumer. This isn't a short-term dynamic. This is a long-term structural change within the industry.”
Specifically, the trend McDonald's has been watching for a decade, trying to come up with solutions, revolves around a shrinking cow herd. A shrinking cow herd means there's less cow beef — a primary source of domestic lean trim — available. That, at a time when alternative uses are growing for lean carcass components, such as inside rounds, flanks and plates — muscle groups that used to go almost exclusively into grinding — and consumer demand has shifted to leaner ground beef.
Less Supply For More Uses
For perspective, hamburger patty manufacturers that serve companies like McDonald's take lean trimmings from fed beef and mix them with the leaner trimmings from cow beef and bull beef.
According to Keith Belk, Colorado State University meat scientist and professor, the bulk of fed-beef trimmings — trimmings generated from the fabrication of fed-beef carcasses — are 60-70% lean. The traditional retail ground beef that many of us remember as regular ground beef a decade ago (basically 73% lean and 27% fat) was comprised primarily of fed-beef trimmings blended with small amounts of lean trimmings from mature cow and bull carcasses or imported lean-beef trimmings.
Today, however, Belk says consumer demand for leaner ground beef that contains as much as 95% lean muscle means substantially more lean-beef trimmings from mature cow and bull carcasses or imported trimmings are required for mixing with the fed-beef product.
“The balance has been tipped such that today's ground beef contains much higher proportions of lean trimmings from cows, bulls and imported product, and much lower proportions of fed-beef trimmings,” Belk says. “U.S. ground beef manufacturers have always required some lean trimmings, but you never heard about the problem in the 1970s and '80s because we used a much higher percentage of fed-beef trimmings to blend with these leaner products to hit the correct compositional target.”
That's where the problem starts. “We do not make enough of the lean beef trimmings in the U.S. today to satisfy the demand created by a shift to leaner products in retail supermarkets and at McDonald's and other QSRs,” Belk says.
In terms of cow beef, there are about half as many cows harvested each year as in the 1970s. That's due in part to the fact that producers keep producing as much and more beef with fewer cows. Plus, more of the cow beef and leaner fed beef that was used for lean trimmings in the past is now channeled toward higher value markets, be it as steaks for lower-priced restaurants or ingredients for the growing category of heat-and-eat beef items.
“The value of the beef carcass is continually increasing, but these alternative uses divert product away from what was available for lean trimmings in the past,” Belk says.
USDA statistics show that U.S. consumption of ground beef has hovered around 29-30 lbs. per capita for several years. But today, international demand is also claiming more of the carcass that used to go into lean trim.
As an example, Derrell Peel, Oklahoma State University Extension livestock marketing specialist, says: “If you look at exports, we've essentially found a higher value for a lot of the product we used to grind.
“The trade-adjusted figures have reduced the availability of processing meats (lean trim) by 12-13% over the past five or six years. That's offset by a four- to five-percent increase in imported lean trim, but that's still a deficiency,” Peel says.
If that wasn't enough, Belk says tougher food safety standards today mean some lean trimmings — safe by previous standards — must now be cooked rather than ground.
Bottom line, there's a growing demand for leaner ground beef and less domestic supply of the components necessary to meet that demand.
The Tangled Web Of Economics
So, if the beef industry is selling more of the carcass for higher values than ever before, why be concerned about ground beef?
For one thing, Davey Griffin, Texas A&M University (TAMU) associate professor of meat science, explains that, while lean trim is among the lowest value parts of the carcass on a unit basis, overall it represents the most pounds and gross dollars in a carcass.
Griffin recently fabricated a Select Yield Grade 3.1 carcass, fairly typical of the industry. Lean trimmings in the carcass accounted for about 22% of the weight and 10% of the live animal value. Cowboy math says that's $7.50/cwt. in a $75 fed market.
Plus, this example reflects an 80-20 lean-to-fat blend, so it's a conservative account of the contribution of trimmings to value overall (fabricated to a fatter blend of trimmings, there would be even more pounds and more gross value).
Reduce ground beef consumption, which now accounts for about half of all beef sales (depending on the source consulted), and there's an exponential impact on beef value overall, which ultimately filters down to the producer.
Keep in mind that beef buyers such as McDonald's are feeling the same economic pinch as producers in regard to record-large, food protein supplies. Even though many producers would argue that cow prices remain lower than supplies should indicate, Hayes says buyers of lean trim are paying 20% more for it now than just a couple of years ago. And, before you assume the differential is all packer profit, remember the increased food safety standards and costs being applied throughout the supply chain.
So, QSRs are paying more for the product. If McDonald's — which never dabbled in the imported trim market until 2002 when it began experimenting with a 25% mix of imported trim in 400 of its Southeast stores — and others rely more heavily on that market, supply and demand fundamentals say the price of it will increase. That prospect is surely gut wrenching to QSRs, which have a long history of battling on price, especially at a time when price inflation across much of the U.S. economy is stagnant to deflationary.
Looking For Solutions
Hayes' basic job is to manage the supply of products McDonald's needs to keep its 13,300 U.S. stores stocked on a consistent basis. He explains that, while McDonald's has adequate resources to secure an adequate supply of the products to meet its needs, “We have a number of programs in place to deal with what we consider to be an imminent shortage.”
While one of those resources is an ample supply of imported lean trimmings, he adds: “I don't know that it would be fair to say we are looking to that as the primary solution to the problem we have here in the U.S.”
For one thing, McDonald's core business philosophy is to support the suppliers in the country in which they do business. In the U.S., Hayes explains, “We're partners with U.S. agriculture. In virtually every category, we're one of the largest, if not the largest, single consumer. McDonald's first choice has always been to buy domestically. Our preference is to look to the American producers and work with them to fix the problem.”
Indeed, McDonald's buys 1 billion lbs. of beef each year. That's the equivalent of 5½ million head of cattle.
Short-term, if the lingering drought forces further cow liquidation, lean trim supplies should spike up. In the long- term, however, that would make the volume of cow beef even scarcer.
Potential long-term domestic solutions that fly immediately across the mind are easily shot to pieces:
A shift in consumer demand back to a fatter ground beef product. That doesn't seem likely.
Leaning up fed-cattle production. That's not likely, either, even ignoring the economic barriers to such a move.
QSRs increasing the fat content of the hamburgers they sell. This also seems unlikely, though pre-cooked products do offer the advantage of leaning up a product through cooking but at higher cost.
Pulling more of the trim back from higher-value alternative uses. Again, not likely.
Likewise, for those who have wondered why the market won't support grass fattening cattle for whole-carcass grinding, Jeff Savell, a TAMU meat science professor says, “You could do that if you were willing to give half the carcass's value away. You just can't afford to do it.”
One possibility that Peel sees is in the shifting preferences of Mexican consumers.
“In the last year or two, per-capita consumption of cow beef in Mexico has declined to 20-25 percent of total consumption, down from roughly 33 percent just 10 years ago,” Peel says. “It's entirely possible that within the next 5-10 years, Mexico could be in a surplus situation and could supply us with cow beef (the bulk of imported lean trim currently comes from Australia and New Zealand).”
No Single Answer
Hayes says there's no single answer. “And, I don't think McDonald's will be the one to come up with the answer,” he adds. “I believe American producers, as they have throughout history, will respond to the challenge and come up with a solution.”
Part of the solution might revolve around the search for value-discovery alternatives in which the industry is already embroiled. In the case of balancing supply for consumers' dichotomous demand, Hayes believes: “It's about encouraging production. Financial incentives today focus on the high-end, well-marbled product. At the same time (with demand for leaner ground beef), the consumer is telling us that might not be the best economic model. The challenge is to develop a model that produces both.”
For folks like Peel, the solution is much simpler: “If we can buy it somewhere else cheaper than we can raise it here, why not do it? Let's buy product where it makes the most sense and sell it where it makes the most sense.”