March 2014 Articles

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Beef Demand Index Improvement

Beef Demand Index Improvement Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
Even as consumers were paying record high prices for beef in 2012, the all fresh beef demand index calculated by the Livestock Marketing Information Center (LMIC) posted a 3.7% annual increase over 2011. This marks the second straight year of improvement in beef demand. Since the third quarter of 2010, there have been year-on-year increases for each quarter using the all fresh beef demand index. Retail pork demand was estimated to be slightly lower in 2012 by LMIC while the University of Missouri estimates chicken demand improved approximately 1%. The all fresh demand index now stands slightly below the level of 2008. This demand index accounts for demand for all types of beef whether it is roasts, steaks, or ground beef. Given the negative press regarding lean finely textured beef last year, the demand index indicates the coverage did not have an apparent lasting impact on beef demand by switching to other types of meat. This partly reflects the supply chains ability to substitute other sources of lean ground beef due to consumer rejection of lean finely textured beef. Demand indices reflect not only inflation adjusted prices but also the level of supplies available to the public. Much space has been devoted to the impact of tightening domestic supplies in recent months and its impact on per capita supplies. However, the level of beef imports can increase/decrease the level of domestic per capita supplies. U.S. imports of beef were 7.9% higher during 2012 than a year prior, reflecting closure of currency fluctuations, slaughter facilities in Canada and consumer rejection of lean finely textured beef. Total U.S. imports of beef may have increased, but imports as a percentage of total domestic disappearance was only 8.6%, nearly 2% below the historical average. So what can be said about beef demand for 2013? All signs point to lower domestic beef production and higher beef prices. The question then becomes how quickly do these prices rise and passed on to the consumer? The wholesale Choice boxed beef cutout has struggled since the turn of the year and putting downward pressure on live cattle futures during this time period. Much discussion has focused on the need to cross and hold the $200/cwt threshold to support current live cattle futures. While this is needed to support higher cattle prices, this strength may come from primals other than the middle meats (i.e. steaks) as it has the past couple of years. The follow-up question to how fast prices rise is whether consumer incomes or spending keeps pace with rising prices? After adjusting for inflation, per capita disposable income has been growing the past three years. Per capita disposable income for 2012 was less than 2008 levels, but still higher than middle part of last decade. The restoration of the Social Security tax to 6.2% (from 4.2%) is being felt throughout the country and reducing the amount of money consumers have to spend. Finally, consumers have spending more of their income as the annual personal savings rate was 3.9% of disposable income in 2012, the lowest it’s been since 2007 (2.4%). This is potentially good news to be supportive of beef prices. However, the monthly savings rate increased to 6.5% in December 2012 (up from 4.1% November 2012). This increase is likely due, in part, to concern over the fiscal cliff and the likelihood of increased taxes to start 2013 that was the subject of much discussion in December. If the savings rate stays at or near this level, it could be a signal that consumers are increasingly price conscious given the increase in gasoline prices in recent weeks price increases from last year’s drought will be reflected in grocery bills soon, if they are not already. As the past couple of years have shown, a tough economy doesn’t necessarily result in a decrease in aggregate beef demand. Given that beef demand is an aggregate of different cuts, higher prices can and often results in consumers shifting from higher valued middle meats (i.e. steak) to less valuable cuts such as chucks and rounds. This may limit the upside in beef and cattle prices in the near term, but the ability of consumers to shift between different cuts that will provide them value will provide consumers the ability to continue purchasing beef.