Consumer demand tells positive story for U.S. beef moving forwardWritten by Saige Albert
As 2015 brought expansion of the U.S. beef cattle herd, it also brought a continued reduction in slaughter numbers. With that, high prices for beef have been seen across in last year.
During an Aug. 11 edition of the Tonsor Beef Report, sponsored by Meatingplace and Kansas State University (KSU), KSU Economist Glynn Tonsor looked at the reasons he is bullish for the beef industry over the next year.
In 2014, cutout values were “off the charts,” according to Tonsor, who noted that 2015 also started with higher cutouts.
“At the end of May and early June, we had erosion of cutout values,” he continued.
Ribeye prices were notably higher than the five-year average in 2014, and 2015 held the same seasonable patterns until May, when notable deterioration was seen. Ground beef, however, remains stable.
“There are parallel charts from the ground side,” Tonsor said. “This is a mixed bag when we talk about muscle cuts compared to ground beef.”
“These impacts are the net of multiple things, including concerns with growing cold storage and inability to push these products forward to the consumer, he added.”
To give context to the beef production story, Tonsor looked at pork and chicken production.
“Pork expansion started in the first quarter of 2015,” Tonsor explained. “We had a lot more commercial pork, and the impact of porcine epidemic diarrhea virus (PEDv) is behind us, or at least it appears to be behind us.”
Broiler production also increased in the first quarter of 2015, and increases aren’t projected to stop.
However, increases in beef production aren’t predicted until the fourth quarter of 2015.
“Total red meat and poultry production will increase in every quarter of 2015 and every quarter of 2016,” Tonsor said. “That is mainly in response to an economic signal to do so.”
He continued, “At the same time, we are starting with more meat in the freezer. We have a lot more meat in cold storage than the five year average.”
Logistical challenges in the first quarter with port and labor disagreements, the development of avian influenza and the strength of the U.S. dollar slowed exports, which also led to increases in the number of pounds of beef in cold storage.
“There is a mixed view on how long that might last,” Tonsor said.
Despite challenges with markets and excesses in cold storage, Tonsor remains bullish for the beef industry based on demand and consumption.
“As we look at beef consumption, we are consuming a lot less per person,” he explained. “Likewise, we are consuming less pork per person than we used to. By historic standards, we have room to increase the pork consumed per person, and there is still room for increase on the beef side.”
By totaling red meat and poultry consumption, more consistent data can be seen.
Between 1991 and 2014, Americans consumed 200 to 250 pounds of red meat and poultry per person. In recent years, data show that poultry has increased its share of protein consumption and beef’s portion has shrunk.
“It is not sufficient to talk just pounds. We also have to talk about what is being spent,” Tonsor said. “The real positive story for beef is the uptick in terms of dollars spent per person on beef and pork, in particular, and even broilers.”
“Consumers are voluntarily spending more for these meat products, which is a great story,” he emphasized.
As a percent of disposable income spent, less than one percent of American’s disposable income is spent on beef.
“When we look at 2014, 0.8 percent of disposable income was spent on beef,” Tonsor said. “We are spending less of our disposable income on beef. In areas where there is strong demand, there is still upward potential.”
In addition, when looking at beef as a percent of disposable income, it makes up a very small portion. For Americans, 30 percent of income is defined as disposable. Because one percent is such a small portion of that 30 percent, Tonsor said Americans are less sensitive to price changes.
“Demand is also growing, and there is still room to absorb the increased pounds that will come out without dire impacts,” Tonsor said.
In looking more specifically at demand, the second quarter all-fresh beef demand index shows a 7.2 percent increase – representing a year-over-year increase in 19 of the last 20 quarters.
“Per capita consumption was down 2.8 percent and the actual all-fresh beef price is $6.07,” Tonsor said. “That is a 10.5 percent increase in price compared to 2014.”
While prices increased 10 percent over the second quarter, Tonsor explained that the consumer saw more value in those pounds of beef and was willing to pay higher prices.
“It sets the industry up to absorb growing beef supplies,” he added. “Over the next three to five years, we will have supply pulling down and demand pulling up. Since we have those factors going in opposite directions, the importance of demand will be magnified. There are a lot of reasons to be bullish about beef.”