Beef case at a grocery store Getty Images/Spencer Platt

Demand signals mixed for beef

Beef demand should remain stronger during this period of the cattle cycle than the last time production was as high.

Although lighter carcass weights helped dilute the impact of increasing cattle numbers so far this year, demand also appears stronger than some barometers suggest.

Consider the beef demand indexes maintained by agricultural economist Glynn Tonsor at Kansas State University. They represent aggregate domestic consumer beef demand — both retail and food service, based on USDA beef disappearance data and Bureau of Labor Statistics (BLS) reported prices.

The second-quarter Choice Beef Demand Index (CBDI base year 1990) was 84, which was 2 points less than last year and 5 points less than in 2015, when it was the highest since 2007 (Figure 1). That follows a decline of 5 points in the first quarter. At 87, last year’s annual CBDI was 3 points less than the previous year, which was the highest since 2004 (Figure 2).

The trend is similar for the All Fresh Beef Demand Index (AFBDI).

The second-quarter AFBDI was 84, which was 4 points less than the prior year and 6 points less than in 2015 — the highest since 2004 (Figure 3). At 87, first-quarter AFBDI was 5 points less than the previous year. The annual AFBDI last year (89) was 4 points less than the previous year, which was the highest since 2004 (Figure 4).

In broad terms, Tonsor explains, “[Beef] consumption has increased, while the price to consumers has been lower than anticipated.”

That’s not the whole story, though.

Real-time data change the picture

“If you look at grocery store scanner data — prices actually paid at retail — demand was higher four of the first six months of this year,” Tonsor says.

There are a couple of likely reasons for such a disconnect with the aggregate demand data, Tonsor explains. Either food service sales were significantly poorer than those at retail, or the USDA and BLS numbers are not representative of the trade.

That’s one reason he and fellow K-State agricultural economist Ted Schroeder developed some alternative indexes for the industry’s consideration, via the beef checkoff-funded study “Creating and Assessing Candidate Food Service and Retail Beef Demand Indices.”

The most-used beef demand indexes, like those mentioned here, aggregate the volume of beef disappearance from retail and food service. They use simple average in-store product label retail prices — not actual grocery store transaction prices adjusted for volume.

“They reveal nothing about heterogeneity in demand response across market channel, U.S. region or product type,” Tonsor explains. “Having beef demand indices that measure actual consumer purchases by market channel and use volume-weighted prices actually paid by consumers are more accurate and precise than existing beef demand indexes.”

Exports are key to current beef prices

Another part of the demand equation, and a growing one, concerns beef produced in this country but consumed elsewhere. As Tonsor says, “Exports are the reason current beef and cattle prices are higher than we expected.”

Through July of this year, exports accounted for 711,364 metric tons and $3.97 billion, according to the U.S. Meat Export Federation. That represents a year-to-year increase of 11% and 15%, respectively. The export value per head of slaughter animal so far this year is $273.52.

Besides the endless work that goes into creating and maintaining export demand, Tonsor says, “One reason exports are so positive currently is lucky timing — and some variables that producers can’t control.”

For instance, there’s less beef coming from Australia — a key export competitor — as that country rebuilds from drought. Brazil — another key competitor — faces challenges with both political scandals and animal health issues.

Then there’s the weakening of the U.S. dollar and China opening its door to U.S. beef for the first time in more than a decade.

Soon enough, other variables could shift the winds of favor: everything from the U.S. withdrawing from the Trans-Pacific Partnership to chatter about renegotiating the North American Free Trade Agreement. However it unfolds, there’s little doubt that exports need to grow in order for the U.S. industry to maintain its size and infrastructure.

In the meantime, as beef production grows for at least a few more years, Tonsor points out that the nation’s economy is stronger and beef demand is stouter than the last time that so many pounds of beef were on the market. That occurrence was in 2008, when the nation was just teething on the Great Recession.

“Consumers today are able to absorb more pounds of beef at higher prices because of the health of the nation’s economy,” Tonsor says.

TAGS: Prices Outlook
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