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Consumers Hold The Key

Retailers look set to feature beef aggressively during May and June, but there’s a high level of uncertainty as to how consumers will respond

All wealth that flows to the Canadian and U. S. beef industries comes from consumers. If they don’t buy beef, there would be no industry. It’s that simple. That’s why consumer buying this spring is more important than ever for packers, cattle feeders and producers. Beef demand has taken a pounding this year because of the economic crisis that has particularly impacted consumer spending, even on food. How Americans respond to the start of the grilling season that is just under way will be a key measure of the industry’s fortunes the rest of the year.

The beef complex saw a much-anticipated rally in live cattle and wholesale beef prices the third week of April. But this was a supply-, not demand-induced surge. Packers had sharply curtailed fed beef production the previous four weeks and sold a lot of product forward. So offerings on the spot market were light. This allowed packers to raise prices for those short-bought beef buyers who urgently needed product.

Retailers look set to feature beef aggressively during May and June, the two strongest demand months of the year for beef. But there’s a high level of uncertainty as to how consumers will respond to the features. Will they splurge on beef for a couple of weeks and then return to buying hamburgers or chicken? Or will their spending be more sustained and allow the beef and cattle markets to rally further?

Last year saw boxed beef prices subside slightly after a big April rally (the Choice cutout increased US$18.18 per cwt. in 15 business days), trade steady through May and then rally strongly again from mid-June to early July. The Choice cutout during that time increased US$17.37 per cwt. to a daily high of $173.80 on July 10. It is highly unlikely the market will see that kind of rally this summer because of reduced consumer spending and the availability of cheaper protein such as pork and chicken. Consumers are still making purchases based on absolute price rather than relative value. Beef demand will continue to suffer as a result. The only possibility of a big rally is if packers kill far fewer fed cattle than expected in May and June. Overall kills then are forecast to average about 675,000 head per week, compared to just over 600,000 head per week for the five weeks to mid-April.

Meanwhile, a new dairy buyout program has started in the U. S. amid concerns as to its impact on lean beef and slaughter cattle prices. Cooperatives Working Together (CWT), which is funded by dairy producers, accepted bids through April and now is notifying successful bidders. This will be the seventh herd retirement round since CWT began operations in the summer of 2003. As with recent rounds, CWT has no set target for the volume of milk or the number of cows to be removed. But observers say the dairy industry believes it needs to cull 325,000 cows by the end of September to bring wholesale milk prices back to a breakeven for producers. Others say the number might be half that or less.

CWT will not pay more for cows than what they are worth in the marketplace. The incentive for producers is that CWT also pays them the equivalent of 12 months of milk production per cow. In turn, producers must sell their entire herds and not reenter the industry for a year. How many respond is of vital interest to Canadian beef and dairy producers, as many regard the U. S. market as a valuable outlet for their cull cows. An average of 3,854 Canadian cull cows per week came south the first 13 weeks of 2009.

Cattle Buyers Weekly covers the North American meat and livestock industry. For subscription information, contact Steve Kay at P. O. Box 2533, Petaluma, CA 94953, or at 707-765-1725, or go to www.cattlebuyersweekly.com

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

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