The cattle market is unique when it comes to analyzing the fundamental structure. Unlike other commodity markets, regular supply and demand relationships don’t hold water in the cattle complex. For example, feeder cattle prices were at 10-year lows this past fall and yet the U. S. calf crop was the lowest since 1949.
Price forecasting can be extremely difficult because many variables can have a large influence on price. Some variables tend to be more of a factor at different times of the year or at different times in the economic cycle. Beef is also a secondary item, meaning that it is not a staple good like milk or eggs. Higher-end beef products are usually consumed by people with average to above-average income. So what are some of the factors that currently influence beef demand and have potential for change in the longer term.
First, beef demand is heavily dependent on consumer incomes and expenditures. U. S. unemployment moved from 4.5 per cent to 10 per cent within a 24-month period; Underemployment also skyrocketed to nearly 18 per cent. Underemployment is the number of people who have stopped looking for work, gone back to school or have taken a lower-paying job outside their field. There were 31 million Americans on food stamps at the beginning of 2009 and this number has not significantly changed. Restaurant traffic started to decline in May of 2008 as unemployment increased. This was followed by 13 straight months of declining restaurant traffic. During the recession, people stopped spending money on any type of excess. Some reports state that high-end steak houses experienced 25 to 30 per cent less traffic in 2009 compared to 2008. Unlike past recessions, the middle-to upper-income earner realized a sharp decrease in disposable income.
The recession caused secondary reactions in consumer lifestyles, perpetuating the decline in beef demand. For example, more women working outside the home causes lower beef consumption due to the convenience factor. This has been large factor as more men were laid off or took a lower-paying job. More women took full or part time work to help pay the monthly bills.
The large supply of competing meats hung over the beef market for most of 2009. Beef and pork exports started to decline in the fall of 2008 due to the credit crisis and slower demand from Southeast Asia. Swine flu occurred in April of 2009 causing pork supplies to backlog in the domestic market. Many countries closed their borders to pork and poultry. Lower prices do not have a large effect on beef consumption. For example, if beef tenderloin prices are lowered from $20/lb. to $19/lb., there is only a marginal increase in demand. However, as incomes decreased, families focused on lowering their retail food budget. Industry estimates suggest an average family cut their food budget by 30 to 40 per cent.
Food safety and nutrition remains a large component of beef demand. The problems with BSE are still ongoing. Traceability or premise identification and age verification have become more important with the U. S. Country-of-Origin labelling law and for other export markets such as Japan. The beef industry is now coming up to modern industrial standards at the grass roots level. The beef industry is also contending with “food-ceuticals;” the use of food to cure certain diseases. Alternative or special diets have been shown to cure heart disease and certain types of diabetes, which is becoming more common.
The growing obesity problem in North America and the ageing population are demographics that could have a large effect on consumption patterns longer term. The medical community is identifying new diseases and viruses every year. The bloodlines of each generation are getting weaker and becoming more susceptible to diseases, viruses and bacteria. For these reasons, beef is not always viewed favourably in media circles.
In conclusion, U. S. per capita consumption beef consumption will decline during 2010. The economy is coming out of recession and higher consumer expenditures will be the main factor needed to increased cattle prices. Cattle prices lag other commodities by eight to 12 months because people don’t change the food spending patterns overnight. A new frugality has set in with the average consumer. There is potential for significant changes in tastes or preferences longer term.
Gerald Klassen analyses cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in Southern Alberta. For comments or speaking engagements, he can be reached at [email protected]or 204 287 8268.