Retail beef prices jump in 2012 with supply constrained

The retail price for all fresh beef averaged a record-high $4.772/lb in October, $0.124/lb higher than in September and $0.276/lb higher than October 2011.  For the year to date, all fresh retail beef averaged $0.254/lb, or 5.8%, higher than for the same period in 2011.  Higher retail beef prices this year have primarily resulted from the declining quantity of beef available to consumers.  While quantity data are not yet available for the month of October, it is apparent that Americans are eating less beef.  For the third quarter of 2012, retail beef consumption was 14.5 lb per capita, a low for the third quarter of any previous year.  It's about 1% lower than 2011:3 and nearly 5% lower than 2010:3.

For the July-September quarter, all fresh retail prices averaged $4.688/lb.  That's $0.23/lb higher than the third quarter of 2011 on a nominal basis, or about $0.12/lb higher on a real (inflation-adjusted) basis.  So, real all fresh retail beef price was 3.4% higher in the third quarter this year compared to 2011.  That price increase was enough to offset the 1% lower consumption last quarter for beef demand to increase 2% for the third quarter.  This compares to first quarter demand increasing by 3.5% and second quarter demand increasing by 4%.  Thus, it appears that beef demand growth is beginning to slow.

Do you remember that earlier this year in this column I said that substantially higher retail prices offsetting sharp reductions in consumption is a hard way to increase beef demand?  Selling more quantity at higher prices would be a preferable demand increase to the industry.  However, it is possible for demand to increase in the cases where quantity demand increases much more than prices decline and when prices increase a lot more than quantity demanded decreases (which is what has been occurring for the last year).  One of the reasons I posit the idea that this latter way of increasing beef demand is not so desirable is because consumers are essentially learning to consume less beef.  That's necessary as the cattle inventory continues to contract, but at some point when cattle numbers increase and beef production increases, will consumers increase beef purchases back to the previously high amounts?  The answer is yes; however, it might take substantially lower prices to get them to eat more at that point.  So, we could be setting up the scenario of higher beef demand now coming at the expense of lower beef demand in 3-5 years.

The outlook going ahead through the remainder of 2012 and into 2013 is not particularly rosy for beef demand.  Based on beef production forecasts, population forecasts, and expectations for imports and exports, retail beef consumption will drop to 14 lb per capita in 2012:4.  In 2013, beef consumption on a retail weight basis will average near 55.7 lb per capita, down from 57.3 lb per capita in 2012.  In 2014, beef consumption will drop further still to less than 53 lb per capita.

So, it is likely that quantity demanded will continue declining over the next several quarters.  Can retail prices increase enough to ‘offset" these consumption decreases such that beef demand actually increases?  Maybe, but it will be hard for recession-weary consumers to continue paying higher prices.  Certainly, the general economy is not improving much, leaving consumers with less disposable income to spend on beef and other items.  The Dow Jones Industrial Average has had nearly a 1,000 point sell-off since early October (a large part of the drop immediately followed the November 6 election), after gaining ground through much of the year.  Unemployment remains near 8% and underemployment remains high.  Real gross domestic product is growing by 2% or less this year.  By most measures, the economic conditions in the country suggest consumers are still struggling months after the Great Recession.

One interesting barometer of consumer attitudes towards beef and other food purchases is restaurant demand.  The National Restaurant Association's Restaurant Performance Index indicated that although the restaurant industry's key performance metrics showed the industry was expanding during the 11 months ending in September, the rate of that growth was slowing during the last several months, particularly for same-store sales.  Interestingly, other consumer data indicate fewer young adults are eating out, which has traditionally been one of the most lucrative market segments for the restaurant industry.  It is these young adults that are believed to be hard-hit by the recession and have been unable to gain employment after college, etc.  Finally, the new advertised features at several rapid-serve restaurants suggest they are trying to regain business by cutting prices, offering new products, or new ‘combo" meals.

The information in this report is believed to be reliable and correct.  However, no guarantee or warranty is provided for its accuracy or completeness.  This information is provided exclusively for educational purposes and any action or inaction or decisions made as the result of reading this material is solely the responsibility of readers.  The author and South Dakota State University disclaim any responsibility for loss associated with the use of this information.  There is substantial risk of loss in trading commodity futures contracts and traders should consult their brokers for a full disclosure of these risks to determine whether such trading is suitable for them in light of their circumstances and financial resources.