Don’t expect steak sales for Father’s Day

Price impacts of COVID-19 on the beef industry were wide spread and retailers are still feeling the pinch

Given the sharp increase of wholesale costs, retailers probably won’t be putting beef on sale any time soon.

This Father’s Day, people probably won’t see sales on their favourite beef steaks—but they shouldn’t blame the butcher or retailer. Blame sits almost entirely on the coronavirus.

COVID-19 had a catastrophic impact on beef production in North America. The spread of the virus resulted in several plant shutdowns or slowdowns, which in turn meant significantly reduced beef production. In the United States, from the week ending March 28 to the week ending May 2, plant production declined by 36 per cent. In Canada over the same weeks, production was down by over 60 per cent.

Despite this, consumers rarely saw beef shortages in that period. The only time there were notable shortages in stores was in March when panic-buying led to empty shelves.

While beef features in grocery flyers have dropped off this spring, consumer price increases have actually been relatively modest. Now that beef production is returning to normal, it’s likely consumers will see lower beef prices soon.

It can be easily argued that the beef supply chain performed very well during the pandemic. Despite that, they have been blamed for hiking prices. Nothing could be further from the truth.

A strong relationship between retail and wholesale

There isn’t a beef price report at the packer level in Canada but it can be said with confidence that beef prices at the packer or wholesale level are very similar between Canada and the United States based on comparing Canfax and USDA price data.

At the beginning of the year, prices at the packer or wholesale were basically unchanged from the prior year. The first quarter of 2020 saw pricing roughly the same or lower than 2019 at the packer level. The retail prices consumers paid, as reported by StatsCan, were increasing from five to seven per cent in the first quarter compared to the first quarter of 2019. This made beef among the food price inflation leaders at the grocery store.

This inflation, which continued into the second quarter, was in response to price increases at the packer level in the second half of 2019. The assertion here is that as packer values go, so goes retail, albeit with a two-month lag.

As of April 2020, beef prices at the retail and packer level were both increasing at about 8.5 per cent. Based on the two-month lag assertion, the retail price increase was unusually high. The big retail consumer price increase in April was likely due to immediate beef cost increases from packers. Those packer cost increases were driven by reduced production.

Retailers also cut back on beef feature ads in April. Reduced featuring would also have resulted in higher overall retail or consumer beef price inflation.

Virus impact

Going into May, packer prices increased by over 80 per cent on average compared to May last year. This was due to the massive reduction in production caused by virus-related plant closures. Supplies of beef plummeted, so packer prices shot up. These cost increases were unprecedented.

Grocers scrambled for supplies, but these were restricted due to the impact of the virus. Grocers had to pay up for whatever was available. Retail price inflation for May has not yet been reported by StatsCan, but it likely increased by more than 5 per cent but less than 10 per cent.

As packer production has recovered from those coronavirus depths, prices have declined. As of the end of the first week of June, packer beef prices declined by about 40% from the peaks in mid-May though they were still well above what they were a year ago.

Retailers not covering costs

The net result for retailers from January through May was that their beef margins or profits went from normal to terrible. Retail price increases during May were nowhere near enough to cover even a modest share of the packer costing increase.

In May, retailers absorbed the massive beef cost increases through reduced margins. The beef price increases in May were small compared to the cost increases retailers paid for beef.

Beef cost increases were also far outpacing increases in the other two main meats. Beef’s price in 2020 relative to chicken and pork was far greater than the average of 2017 to 2019.

Featuring decline

Another important point is that, given the volatility and increases in beef costs at the packer level, retailers have been reluctant to feature beef. For one, retailers won’t feature if they aren’t sure they can get adequate supplies.

Beef’s share of features on the front page of flyers all across Canada declined to record low levels in recent weeks.  Beef saw very little action on the critical Victoria Day weekend. It will probably miss out on Father’s Day ads, and it’s expected that ads will be sharply curtailed for Canada Day. This is important because, depending on the retailer merchandising strategies, features could move 35 to 45 per cent of their beef volumes. A lack of featuring means a lack of beef movement

Serious questions

At about five per cent of total grocery sales, beef is one of the biggest single items in the store according to StatsCan data. It is also a critical merchandising tool. For all big holidays last year, beef led the way on the front of the flyer. Beef drives traffic or it would not be there.

Looking ahead, retailers have some serious questions to address now that, given beef’s high cost, it’s a margin burden.  It’s not performing up to par and it’s not competitive against the other meats in terms of purchasing cost for retailers.

Retailers will be deciding whether to increase consumer beef prices to recover lost margin and to try to keep up with their runaway costs. Given how important beef is, retailers may worry that the higher prices will drive customers away, or if other retailers will also increase prices or keep them low to undercut them.

My bet is that regular prices will increase by another one to five per cent in June and then retailers will hold the line through the summer as packer costs return to normal or lower than normal levels. July and August could even see price decreases for consumers once retailers are confident that packer costs are going to stay low.

Given the continuous high costing and the fact that summer features are being planned now, there is not likely to be great beef ads soon. They should, however, begin to look more attractive again in August.

Kevin Grier is a market analyst and economic researcher with particular focus is on the meat, poultry, livestock and grocery product sectors. A version of this article first appeared in Canadian Cattle Market Report.

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