U.S. Beef Industry Needs A Two-Market Domestic StrategyU.S. Beef Industry Needs A Two-Market Domestic Strategy
Beef is losing the race with competitive proteins and overlooking consumers’ growing appetite for ground beef.
May 28, 2014
Fact: Per-capita beef in the U.S. was 94.4 lbs. in 1976. Last year, it was 56.5 lbs. — a 40% decline in 38 years.
Fact: Beef’s market share among competing proteins was 46.4% in 1976. Last year, it was 25.9% — a decline of 44%.
“If the beef industry continues to ignore the above trends [and other facts], and fails to get serious about making beef more cost-competitive with other proteins, especially chicken, then you can only conclude that the beef industry will end up where lamb and lobster are today,” says Bill Helming, of Bill Helming Consulting Services in Olathe, KS.
Helming provided the metrics above (basis retail weight from USDA data).
First off, there is a distinct difference between beef consumption and beef demand. At its simplest, demand measures how much of a product consumers will purchase at a given price.
Per capita consumption is a reflection of supply. In the case of beef — a perishable product — everything produced is consumed at some price. Ostensibly, consumption increases with more supply, and vice versa.
“Consumption isn’t demand, but they’re intricately related,” explains Don Close, a Rabobank cattle economist.
Per capita beef consumption has declined about 40 lbs. over the last four decades. Beef production — beef supplies available for consumption — has remained amazingly static during that time.
While the U.S. population has increased by 45% over the past four decades, U.S. consumers don’t want to eat any more beef than was available to a population of 98 million fewer people.
“Average per capita beef consumption has decreased an average of 1 lb. annually since 1976. During the same period, per capita chicken consumption increased 1.1 lbs.,” Helming explains. “Beef was replaced by chicken almost pound for pound.”
Keep in mind total per capita meat and fish consumption in the U.S. increased 6.7% from 1976 to 2013, from 203.8 lbs. to 217.6 lbs.
Beef costs too much
“A lot of people don’t want to admit it, but consumer demand for beef has been shifting to the left,” Helming says. “Market share continues to be lost and at least 95% is explained by relatively high cost, high price and the lack of affordability of beef.”
Close adds that, although it’s difficult to pinpoint an exact reason for the dramatic decline in U.S. beef consumption, it can be broadly attributed to cost, convenience and quality. In terms of convenience, he says preferences and buying habits of U.S. beef consumers have changed significantly since the 1970s.
“Consumers increasingly seek ingredients for quick meals, grab a quick burger on the go or simply shop for value. The industry production model must follow suit,” he says.
Then there’s cost and quality — which are related, but not the way logic might first suggest.
“The increase in retail beef prices relative to competing meat prices has simply driven consumers to more competitively priced protein options,” Close says. He uses the year 2000 as a baseline to explain that composite chicken prices increased an average of 2% annually the previous 13 years, for a total increase of 24%. Retail pork prices increased 41% during the same period — 2.7%/year. Meanwhile, Choice beef prices increased 72%, or 4.4%/year, while all beef prices increased 78%, or 4.6% annually.
The high price becomes more challenging in light of how real income in the U.S. has declined in the last six years for the first time since the Great Depression. Plus, Helming points out, there are 86 million baby boomers retiring or about to retire today, while the fastest-growing segments of the U.S. population are Hispanic and Asian — both of which tend to be lower-income groups on average.
“The beef industry has lost sight of what 90% of Americans can afford to buy,” Helming says. Consumer affordability also helps explain why, without fanfare, about 60% of all beef consumed in the U.S. today is in the form of ground beef.
Ground beef tops steak
Fact: In 1970, 42% of all U.S. beef consumption was in ground beef. It was 57% last year — a 38% increase.
Fact: Of domestic ground beef supply, 25% comes from native cull cattle and 15% from imports. The other 60% comes from fed cattle, equivalent to 42% of all of the cattle fed in the U.S. last year.
“All beef prices, as measured by the Bureau of Labor Statistics, have been escalating at a faster rate than Choice beef prices, indicating that while consumers continue to demand beef, they’re increasingly selecting lower-priced beef options,” Close says.
Helming says that consumption of ground beef has increased because of the high cost, high price and the lack of consumer affordability of whole-muscle beef cuts. “Demand for ground beef is largely price-driven. America today is a ground beef and chicken society.”
The conventional wisdom has long held that half of all beef consumption in the U.S. is ground beef. But Helming says, based on his extensive research, that 57% of all beef consumed in the U.S. was in ground form in 2013 — up from 42% in 1970.
Close goes further: “Based on the core data from the beef checkoff and the additional Rabobank retail sales research, we estimate ground beef, as a percentage of all domestic beef consumption, to be close to 62%. By any analysis, this proportion of ground beef consumption is astonishing and presents enormous implications for the U.S. beef cattle industry.”
This is where quality enters the picture.
“One of the greatest factors inhibiting greater efficiency in the beef industry and limiting its ability to compete with competitor proteins is the growing percentage of fed-beef primals that end up in the marketplace as ground beef,” Close says.
Though more than 60% of the carcass can become lower-value ground beef, Close explains the current production model demands feeding virtually all of them as if they were destined for the higher-value middle-meat market.
Quality isn’t the issue, Helming adds; it is affordability. “Ground beef in the U.S., in its various forms, is a very high-quality product. We don’t have a quality problem; we have a problem with how quality is defined in the beef industry, and with recognizing that beef consumers view ground beef as a high-quality protein.
“The industry has defined quality as being beef from cattle fed high-energy and grain-based feedlot rations to produce Prime, Choice and Select beef carcasses designed to produce expensive beef tenderloin, prime rib and steaks that consumers are buying less and less of because of lack of affordability. The beef industry needs to produce more lower-cost, high-quality ground beef that 90% of U.S. consumers can afford,” Helming adds.
As such, Close explains, “Under the existing business model, the U.S. cattle industry manages all fed beef as if it were destined for the center of the plate at a white-tablecloth restaurant.”
Focus is too narrow
“Despite the fact that the U.S. has become a ground beef nation, the beef production model has changed very little over the years,” Close says. “Little consideration has been given to which cuts the beef consumer is selecting, and why.”
To be fair, after losing consumer demand at the rate of about 1% annually from about 1977 to 1997, the beef industry expended amazing resources in creating a more dependable eating experience for consumers of middle meats. The beef complex even figured out how to fabricate the carcass differently to provide lower-cost middle meats.
The problem is, much as cattle production is the byproduct of land ownership, ground beef production is often regarded as a byproduct of middle-meat production. The industry’s focus has been almost exclusively upon the highest-value but lowest-volume portions of the carcass. Virtually all cattle fed in the U.S. are managed with that goal in mind.
This challenge is compounded by the fact that traditional sources of beef used in ground beef production — cull cattle and imports — are drying up. Thus, a larger portion of the fed-cattle supply — created with the highest-cost inputs — is being diverted to ground beef production, making beef even less cost- and price-competitive with other animal proteins. Helming estimates the equivalent of 42% of all fed cattle went into ground beef production last year.
Close points out that increasing ground beef demand is altering traditional price relationships.
“Historically, all steak prices traded in a range of 2.3-2.7 times [those of] ground beef,” Close explains. “In 2004, the price relationship between steaks and ground beef began to narrow. By 2013, the price for all steaks was just under 1.7 times the price of all ground beef … entirely driven by strengthening ground beef prices.”
So, the problem isn’t that ground beef demand is growing, but that so much beef in the grinding tub is from fed cattle.
Rather than add value to lower-value beef by churning out ground beef that consumers are willing to pay increasingly more for, the opposite occurs: Value is subtracted. That makes beef even less cost-competitive, Close says.
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