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Tough times in the meat case

Prime Cuts from the August 2015 issue of Canadian Cattlemen

May and June are the two best months of the year for retail beef sales in the U.S. But high prices and consumers’ reluctance to spend more on beef put a damper on sales this year. The week leading up to the Memorial Day holiday has the second-largest sales in volume and value while the week leading up to July 4 has the largest.

The Memorial holiday sales were expected to be as strong as last year. So the daily Choice cut-out reached US$265.59 per cwt on May 19. But sales during the holiday week were disappointing and the cut-out plunged $21.48 in 13 business days. It recovered $12.01 of this by June 24. But sales in the July 4 holiday week were also weak. Cut-outs values went into free fall and the Choice had lost more than $20 by July 13.

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The main reason for the poor sales is that retail beef prices remain at record-high levels for this time of year. USDA’s All Beef price in May was $6.06 per pound. This was up only two pennies from April but it was up 10.8 per cent from a year ago. This difference has consumers’ attention and they have responded by buying much cheaper pork and chicken. May pork prices averaged $3.69 per pound, down 10 per cent from last year, while chicken prices averaged $1.93 per pound, down 1.0 per cent.

Beef’s year-on-year price increase versus pork’s decline meant beef prices were record high versus pork at both the wholesale and retail levels. This was likely the same in June and July, as the U.S. pork industry continued to produce far more pork than expected. Beef production for the year to July 11 was down 4.7 per cent on last year while pork production was up 6.7 per cent. Broiler production was up 7.2 per cent.

Beef’s malaise had people scratching their heads for explanations. The high retail prices and lack of aggressive features obviously had had a lot to do with the poor sales. But the U.S. economy continues to improve, more jobs are being created and gasoline prices at the pump remain well below last year. Thus consumers had more disposable income and many people expected them to spend some of that extra money on beef.

Maybe they did but at food service not at retail. Restaurant beef sales are above a year ago. That’s the reverse of what occurred after the 2008-09 recession when consumers spent more of their food dollars at the grocery store. Moreover, retail beef sales are weaker than expected because people are saving more money, from the millennial group (eight per cent of earnings) to people over 50 (nine per cent), says analyst Andrew Gottschalk, HedgersEdge.com. In addition, a lot of 10-year home equity loans taken out from 2004 to 2008 are starting to come due. The peak years of 2005 to 2008 saw $360 billion in loans taken out, he says.

Fed beef packer margins improved sharply in June as the cut-outs soared and live cattle prices fell more than $11 per cwt in five weeks. But the cut-outs’ free fall came just as packers were forced to pay more for cattle. So their margins by mid-July were deeply in the red again. Cattle-feeding margins were also mired in red ink because of the record or near-record high prices of feeder cattle that they placed against the spring and summer months.

The industry is hoping that beef sales in the week leading up to Labour Day will be solid. This week was third in volume and value last year. But retailers didn’t reduce their beef prices much in July and neither will they in August. Beef’s summer sales woes are likely to continue.

About the author

Contributor

A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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