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Are you ready to build a Cadillac? – Part 1

Consumers are willing to make a beef a high-end choice

Beef has long been considered a high-value product. When economies emerge and wealth is created, one of the first things people seek to do is add protein to their diet. At the top of the privilege list is beef. This is evidenced by beef demand indexes when examined on a country-by-country basis. As countries gain affluence, beef demand tends to rise, and rise dramatically. As examples, we’ve seen this in China and India most recently. This privilege may be less visible in a relatively affluent and aging North American marketplace, however, over the last couple of years the retail price of beef has spiked dramatically.

While many of us may follow cattle prices somewhat closely, in the end it is retail dollars from beef sales that really drive the industry. The chart “Average annual Canadian cut-out values” shows the dramatic rise in the value of a wholesale beef carcass over the last five years in particular.

Adapted from Monthly Canadian Cut-out Values www.canfax.ca, January 11, 2016.

Adapted from Monthly Canadian Cut-out Values www.canfax.ca, January 11, 2016. (click image for larger view)

There is a relatively consistent range of price difference between AAA (Choice) and AA (Select) shown by the purple line and the right-hand axis. This is right around $6 per hundredweight, but can range much higher during certain seasons such as peak barbeque season. This makes some sense as marbling becomes an important consideration when folks are paying for and grilling steaks. It is important to realize that our customer’s investment in beef as an eating experience is MUCH higher than it has been in the past, and that contains an unwritten challenge to us as producers.

Another very interesting aspect of the recent rise in beef prices is the concept of competitive proteins and where we fit in the spectrum of consumer choice. As beef producers, we often assume it should be obvious to our consumers beef is the preferred and possibly only reasonable choice. But take a look at the relative pricing information on a few of the options collected by USDA and the Bureau of Labour Statistics. There are a few selected items presented in the chart on Meat Price Spreads.

Adapted from USDA ERS Retail Products www.ers.usda.gov/datafiles/Meat_Price_Spreads/cuts.xls, January 11, 2016.

Adapted from USDA ERS Retail Products www.ers.usda.gov/datafiles/Meat_Price_Spreads/cuts.xls, January 11, 2016. (click image for larger view)

This is U.S. data, but is pretty reflective of the Canadian retail reality. Note the only other meat category priced higher than ground beef are steaks and sliced bacon. More importantly, the price spread between our high-end product (steaks) and higher-end products from other sources (pork chops, boneless chicken breasts) is widening. Now imagine you are standing at the meat counter with a limited budget. But that is the point you may say, beef tastes and is better. While that may be true, the price component of that decision is more important than ever before.

The graph does not present all of the data collected and the categories selected do not necessarily reflect the very highest-value categories. For example, the price of lean ground beef (versus all ground beef) has actually passed that of sliced bacon, and the price of USDA choice or prime steaks is significantly higher than the average price of all steaks as presented on the graph.

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So what does this all mean for the folks with the cows? Obviously high prices drive the beef herd expansion we are starting to see, particularly in the U.S. If you look at the end of the graph and some of the consumer resistance points, we are also potentially seeing a slight drawback of beef prices to reduce the spread with competitive protein sources. That said, what these historically high prices and price spreads really mean for consumers is when people are choosing beef, it is a high-end choice. In other words, they are paying for and expect a luxury product or a Beef Cadillac if you prefer. The old saying that “the best cure for high prices is high prices” is true, but we need to ensure the prices being paid are justified in the consumers’ experience, or the fall will be less than graceful.

In part two, we will explore some ideas to build a luxury product. Surprisingly some of the building blocks may actually reduce the cost of producing the product.

About the author

Contributor

Sean McGrath is a rancher and consultant from Vermilion, Alta. He can be reached at [email protected] or (780) 853- 9673. For additional information visit www.ranchingsystems.com.

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