Lower Beef Prices Positive for Beef Moving Forward

Posted on 03/09/2017 10:23 AM

The beef industry has been greatly disappointed by spring 2016 beef demand, particularly during late April and early May. Choice beef values fell from $225.13 on April 15 to $203.74 on May 6. That seems extraordinarily weak for this time of year, when grilling season is seen as starting to it hit its stride and Memorial Day weekend is looming. We suspect there were several reasons for that weakness and point out that those may soon be mitigated, thereby opening the door to a short-term cattle and beef rally.

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The biggest reason for the disappointing consumer buying may simply reflect the relatively high retail cost of beef. The chart above depicts monthly average Nebraska steer prices, along with monthly wholesale and retail beef values from the USDA's Economic Research Service. It's clear cattle quotes have fallen substantially from their November 2014 peak. In contrast, retail and wholesale prices didn't peak until May 2015. The chart also illustrates the tendency for prices farther up the processing/marketing chain to lag those at the farm level. The spread between the different sectors has also grown over time, which, while disappointing for farmers, isn't terribly surprising.

The chart below illustrates the percent annual change in prices at the various levels and is included due to the rather obvious disparity between the recent shifts in cattle prices and those seen by consumers. One can argue that if prices in the meat case would have declined as sharply as have country cattle values, consumer demand would be stronger. On the other hand, cattle prices tend to be much more volatile than are wholesale and retail figures. Still, given the size of the declines suffered at the lower levels, competition between grocers will almost surely force retail prices downward, which in turn should spur consumer demand down the road.

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One could also argue that relatively cheap pork and chicken are undercutting demand for higher-priced beef. The chart below illustrates the widening disparity between the three sectors and certainly seems to justify that argument. At least a portion of the recent difference stems from the underlying physiology of the animals and the period of time it takes them to grow and reach reproductive maturity. The droughts that hit the Southern Plains, Midwest and West Coasts in recent years also delayed the reversal of the cattle herd liquidation of the 2007-13 period. The current aggressive industry expansion should reduce or at the least flatten the price disparities that have developed. Still, the lag between the price declines seen at the retail level in recent months is very likely undercutting beef offtake.

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On the other hand, we would also argue that beef remains the leader of the livestock/meat industry, in the sense that beef prices exert more influence over those for other meat and protein values than vice-versa. We think it's still true that one of the best ways for grocers to attract traffic to their stores is to run significant beef steak features.

Another factor that seemed to curb consumer buying in recent weeks was the weather. Although it was quite warm in many areas last winter, spring 2016 has been marked by relatively cool temperatures across much of the nation. Moreover, the timely rains that blessed various regions also seemed to arrive on quite regularly on the weekend. Thus, conditions weren't at all conducive to an early start to the grilling season.

All of these factors likely suppressed beef demand in recent weeks. Conversely, at least a portion of these aspects of the situation are changing. The weather is warming, the recent wholesale drop will probably encourage grocers to feature beef more aggressively during the peak of the grilling season (between Memorial Day and Independence Day), which should get product moving.

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