A slumping economy changes consumer eating and dining habits. Caught between high gasoline and home-heating costs, the credit crunch and an uncertain economic outlook, not surprisingly, they’re eating out less and worrying about price more.

Incomes go up and incomes go down, but the demand for food remains inelastic, according to the traditional economic viewpoint. Consumers will shift how and what they consume, but they don’t downgrade their dietary intake. They “trade down.” Rather than go out to eat they make meals at home. They’ll pick up coffee at McDonald’s instead of lattes at Starbucks. Pushing their carts through Costco, they’ll reach for chicken instead of beef. There are signs that all these things are already happening now. 

Food generally has become more expensive  —  according to the Bureau of Labor Statistics, in the first quarter of 2007, food prices rose at an annualized rate of 7.1 percent  —  and meat is no exception. All fresh beef prices are up almost 5 percent from a year ago; pork is up 2 percent; chicken is up 13 percent. But as far as pure costs go, when ribeye is $11.99 a pound and pork is $3.99 a pound, it makes sense that beef is the meat first to feel pressure.

In a study by the American Meat Institute and the Food Marketing Institute, consumers ranked price per pound as the most important factor when they choose meat. On a scale of importance from 1 to 6, price came in at 4.6 — higher than it had ranked the previous two years. “We know consumers are price conscious and even more so when income is strapped,” says Iowa State University professor John Lawrence.

But that same study found meat still frequently makes it to the center of the dinner plate. Out of an average five dinners a family eats at home each week, 4.2 include a meat item. About a third of respondents ate chicken and beef at least three times a week.

Those numbers are from late 2007, when personal incomes were still growing. Those may be among the things changing this year. “Any way you cut it, 2007 was good  —  we sold the same amount of product at higher prices,” says Kevin Good, senior market analyst with Cattle Fax. “That started to slow in the fourth quarter of 2007 and the beginning of 2008.”

The fact that there is so much other protein out there right now is a little bit of a concern for beef sales. An expansion had been underway in pork because of profitable conditions, producing record levels of it; broiler levels had ramped up, too. So there’s lots of competition for the consumer trying to decide how to spend his food dollar.

But so far, beef demand seems fairly steady, says Kansas State University’s James Mintert, and there are two ways to look at that fact. The positive way would be to consider that for two previous years, we saw relative declines in domestic retail beef demand: In 2005, it was down 4 percent from the year before; in 2006, it was down 3 percent from the previous year. So the fact that in 2007 it was essentially flat is good news, comparatively speaking.

On the other hand, it’s not a return to the environment of 1995 to 2004, when there were, with one exception, year-to-year demand increases. “It’s difficult to ascertain the underlying causes,” Mintert says. “One thing I suspect is there’s much less interest in low carb diets, so in light of that, the fact that we held even in 2007 is really kind of a positive.”

Choice/Select

One number that has economists’ attention right now is the unusual Choice/Select spread. “In the last six weeks, the Choice/Select spread has collapsed,” Mintert says. “There’s more weakness in the Choice boxed beef products, reflected in a pretty narrow Choice/Select spread. It was $1.42 last week. Last year at this time it was $10. It could show a changing preference for Select products.”

The Choice/Select spread does tend to follow a strong seasonal pattern  —  one that is narrow in February and widest by Memorial Day  —  but what is different this time is just how narrow it is. One factor is that more cattle are grading Choice than a year ago, but consumer belt-tightening could be another. “It will be interesting to see if we get that kind of change later this year. If not, it could mean we still have a lot of Choice cattle or that people are being bargain conscious,” Lawrence says.

Since much of the high-quality beef goes to the hotel and high-priced restaurant trade, it could also be a sign that business there is falling off. A lot of those meals tend to be business related; it’s not hard to imagine that as businesses pull back, they become more cautious with their entertainment budgets.

It’s hard to know exactly what’s happening in those outlets because many of the high-end restaurants are not publicly traded. “But mid-price restaurants are publicly traded, and the results are not very good,” Mintert says. “There are lots of stories about weakness in mid-price chain restaurants.” For Ruth’s Chris, company-owned restaurant sales decreased 0.8 percent at the end of 2007, after increasing 6.2 percent in 2006.

In fact, last year consumers spent so much more of their food budget on home-cooked meals rather than on eating out, it was the largest year-to-year change since the 1940s.

“I hear reports that trade in volume through restaurants is lower than the year before, and the amount spent is less,” Lawrence says. “If so, beef is probably the most vulnerable because it generally has the most restaurant items.”

On the bright side, those items come in a wide range of prices. While the family steakhouse may suffer, fast-food outlets tend to get along quite well in tough economic times. And at retail, recent product developments offer the consumer lots of choices using less expensive cuts.

Outlook for industry

Obviously, costs are going up at the farm level. Energy costs are a big part of that, and feed is an even bigger part. Hay and distillers’ grains are on the rise, but the primary culprit is corn. After averaging about $2.25 to $2.50 for the past 20 years, corn prices are now soaring between $4 and $5. At the same time, there are near-record numbers of cattle on feed at record weights. “Under these circumstances, normally you’ll see reduced weights and, ultimately, supplies,” Lawrence says. “That’s not yet happened. Markets haven’t had time to fully adjust. I think we will adjust  —  with smaller meat supplies at higher prices.”

That adjustment will signal a long-term shift in the equilibrium for the beef industry, Mintert says. “There’s been a tremendous increase in cost of production for livestock in general. From the industry perspective, it would be nice if we could just put up a sign at the checkout saying, ‘Our costs went up, so beef prices went up,’ because we will have to raise prices. How do we get there? We’ll start providing smaller quantities. The industry will contract and become smaller.”

Reports of rising slaughter numbers may be an early indicator of that trend.

He calls it a long-term change, rather than the usual market ebb and flow, because these higher costs of production are coming from policy changes: Corn is going into ethanol. “That’s not going to go away,” Mintert says. “In a normal supply shortfall, we rectify it in one growing season and get back to regular prices. But last year, we had the largest corn crop on record; 3.3 billion bushels went to ethanol.” In 2008, that will be 3.6 to 4.2 billion bushels.

Unless there’s a significant rise in domestic or ex-port demand, it’s going to mean a smaller industry, selling less beef at higher prices.