February 2012 Articles

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Where's the Beef Demand?

Where’s the Beef Demand?
Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
The rise in cattle prices to historic levels has largely been due to supply factors: higher costs of production, tight supplies of cattle, and lower production of competing meats. A strong and robust export market for U.S. beef also helped, but what about the strength of domestic demand for beef? Higher prices at the farm level are good, but they can only be sustained if consumers (domestic and foreign) are willing to pay for the retail product. Domestic beef and chicken production is expected to decline in 2012 leading to tighter per capita supplies and leading to higher prices at the retail level. Pork production will see a slight increase, but per capita supplies will largely not reflect the expected 1.3% increase in U.S. pork production.
The national unemployment level remains higher than what many consider normal, but the rate currently stands at less than 9%. Nonfarm payroll employment has grown each month since October 2010, but the fact over 1 million people dropped out of the workforce in January is problematic. Consumer sentiment, as measured by Thomson Reuters and the University of Michigan, has steadily been improving of late, even if consumers’ expectations for the future are still guarded. Thomson Reuters/University of Michigan attribute the improved confidence to the jobs gains and forecast a 2.1% gain in real consumer spending this year provided net job growth continues at a modest pace.
As consumer outlook has improved, the consumer savings rate has declined to about 4% of disposable income indicating consumers are starting to spend at a level last seen prior to the start of the 2008 recession. Consumers may be pessimistic about their financial situation for the year, but the fact they are willing to spend more of their available money may be positive news for beef demand. Preliminary estimates show that 2011 beef prices were 10.2% higher than in 2010 and beef prices may rise an additional 4% to 5% in 2012. Retail pork and poultry prices are expected to rise by 3% to 4% in 2012. Optimism must be tempered as inflation for all consumer items was 3.2% in 2011 and regardless of financial position, consumers would have to spend more for consumer items.
The rise in the cost of living and higher food prices combined with consumers spending more of their disposable income illustrates the tug of war that domestic beef demand will face this year. Preliminary estimates for 2011 show that beef demand improved over 2010, but the bulk of the strength was in the first half of the year. Additional bright spots are shown by the monthly Restaurant Performance Index from the National Restaurant Association reaching its highest level in six years during December. Expectations of restaurant owners are more optimistic than the expectations of consumers in the Thomson Reuters/University of Michigan survey at this time. Improved demand for the middle meats which rely on the foodservice industry for the bulk of their demand would go a long way in lifting wholesale cutout values. Keeping this improvement in demand will make an already favorable situation even more so for cattle producers in 2012.