Retail beef prices, after a steady climb the past few years, appear to be tapering off. The average all-fresh beef price decreased about 5% from August of last year to January of 2016 when it was about $5.76 per pound, according to USDA’s Economic Research Service Summary of Retail Price Spreads.
When you look at the monthly 5-Area weighted average for direct-trade fed cattle, August cash trade hit $148-$149 per cwt, according to the Agricultural Marketing Service. It’s been a steady downpull since, with the closest price being the 9.5% decline in September. The worst monthly average since August was in December, when cash fed prices were about 16% less than they were in August. January’s cash fed cattle prices were about 10% less.
While retail beef prices and cash fed cattle prices both trended lower, it’s way too easy to look at the disparity in degree and think that retailers are simply padding their margins at the expense of producers.
In fact, the farm-to-retail price spread for beef has increased over time primarily due to the farm price, say Sebastien Pouliot and Lee Schulz, agricultural economists at Iowa State University (ISU).
They provide insight to meat price spreads in the most recent quarterly Agricultural Policy Review, published by ISU’s Center for Agricultural and Rural Development.
“The wholesale-to-retail spread (the difference between the wholesale price and retail price) is a measure of the margin that the retail segment has extracted,” they explain. “It is made up of retailers’ costs and their profit margins, and while it is impossible to infer from the figure whether the increase is due to increasing costs or to increasing profits, retailers’ total operating margin has expanded significantly and persistently.”
Closer to home, the farm-to-wholesale spread is the difference between the wholesale price and the net farm price, which is the gross farm price minus the value of byproducts per unit.
“In beef, the farm value share has increased since 2000, the wholesale value share has declined, and the retail value share has remained relatively constant,” say Pouliot and Schulz. “At the end of 2015, for a dollar spent on beef, about 45 cents went to the farm (producers), about 10 cents to wholesale (packers), and about 45 cents to retail (grocers).”
Although the trend line was running north for retail share and south for farm share at the end of last year—about to intersect at that 45-cent point—history suggests they’ll be similar even as the farm price comes down. Retail prices have to catch up, in other words.
“It takes time for prices to adjust, and they tend to adjust more rapidly when they are increasing than when they are decreasing,” Pouliot and Schulz explain. “Even if the recent decline in farm prices has not yet been entirely passed to consumers, we expect the pass-through to more fully adjust in the next few months, such that we observe further decline in prices for red meat at retail.”
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