The outlook for cattle and beef prices in 2013 and 2014 is decidedly bullish when examining the supply side factors. As discussed in several previous Cattle & Corn Comments articles, cattle numbers are at half-century lows and any growth this year will be modest at best. While these supply fundamentals could push cattle and beef prices to new record highs in 2013, price advances will be limited by the willingness and ability for beef consumers to continue to pay more for beef.
While a multitude of factors affect beef demand, including prices of competing proteins and consumer tastes and preferences, consumer disposable income is of special interest in a sluggish economy. Generally, consumer income and beef demand are positively related; that is, when consumer income declines, beef demand declines. That’s especially true for higher-valued cuts, but demand for lower-valued beef, like hamburger, can increase when consumer incomes decline. Still, during economic recessions and periods of high unemployment, beef demand as a whole would be expected to struggle. Interestingly, beef demand has been increasing for the last two years. Here’s why: beef price increases have exceeded reductions in quantity of beef consumed.
When measuring beef demand, both the retail price and the quantity purchased (or consumed) must be considered. After all, demand is a schedule of quantities that consumers are willing and able to purchase at various prices. When both price and quantity decreases, demand declines. Conversely, when both price and quantity increase, demand increases. Whether a demand increase or decrease occurs when price and quantity change in opposite directions depends on the magnitude of the changes and the elasticity (responsiveness) of demand.
In 2012, beef consumption (quantity demanded) was 57.3 lb per person. While that represents no change from 2011, it is more than 8.5 lb lower than in 2006. The retail all fresh beef price averaged a record high $4.69/lb in 2012. That’s an increase of $0.25/lb since 2011 and $1.08/lb since 2006. On an inflation-adjusted basis, all fresh beef prices rose $0.12/lb, or 3.6%, last year. So, with no annual change in consumption in 2012 and a 3.6% increase in prices, beef demand increased this last year. Figure 1 shows a beef demand index that incorporates both changes in prices and quantity demanded relative to a base year (1990). The 83 index for 2012 indicates that beef demand was 83% of that in 1990, or 17% lower than the base year. It also indicates, though, that beef demand increased by 3.5% since 2011 (increase in the index from 80 to 83) and 6.4% since 2010.
While beef demand hasn’t increased back to the levels seen in the mid-2000’s when high protein, low carbohydrate diets were popular, a demand increase like that seen in the last couple of years is positive, right? The simple answer is “yes.” However, there is more to it that generates concern for future beef demand. So far, price increases have outpaced the declines in quantity, but that will be increasingly difficult in the next couple of years as beef supplies tighten further. Beef production (quantity supplied) equals beef consumption (quantity demanded) after adjusting for imports and exports. Although the import and export adjustments are meaningful, they are relatively small and domestic consumption tracks closely to domestic production. With no herd growth occurring yet and carcass weights expected to stabilize in 2013, beef production, and therefore consumption, will fall in 2013.
Currently, forecasts are for beef consumption to decline almost 2 lb per person to 55.5 lb per capita in 2013. Beef consumption will likely drop below 53 lb per capita in 2014. In order for beef demand to remain constant (i.e, the index in Figure 1 to remain at 83), real beef prices would need to increase by about 3% in 2013 and another 5% in 2014. So, the question becomes, “how likely are consumers to pay more for beef?” There is no way to know that because consumers’ tastes and preferences change and the economic outlook is uncertain. However, it appears like consumer resistance to higher prices is mounting. Restaurant sales are showing no signs of growth and many rapid serve restaurants are shifting menu items and focus to cheaper pork or poultry. Consumers are likely to make the same decisions in the supermarket when faced with even higher beef prices.
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.
Source: Darrell Mark