Can beef quality be too high?
There have been quite a few concerns recently about the rising cost of beef either causing a substitution towards ground beef or pushing beef to the side of the plate, to be experienced only occasionally as a luxury item. To be honest, I do share some concerns in the long-term if the price of beef does not abate somewhat, but I do not think consumers are ready to leave beef behind just yet.
In the long-term, if we rely too heavily on burger satisfying our consumers demand, we may see some market share erode to pork or chicken, but I don’t think that will happen, at least to a large degree, in the near future.
My concerns have been alleviated somewhat by recent USDA production forecasts for the major protein sources. The PEDv impact on pork production will minimize any price advantages that were expected with previous forecast of increased pork production in the coming year.
While pork production is still expected to increase this year, the current forecast is for only a modest, less than one percent, increase. And, on the other hand, while beef production is still forecasted to be lower that it was last year, the current estimate of a roughly four percent reduction is far less severe than the forecast from the end of last year.
So, the forecasted price advantage for pork in the coming years has diminished a lot over the last few months. The apparent beginning of herd expansion nationally should help keep downward pressure on retail beef prices in the comings years, and it looks like consumers may see some relief in time for grilling season this year, as well. Based on current feedlot numbers, there is expected to be a larger-than-expected peak of fed animals in May or June. While this won’t bring beef prices down a lot, there could easily be a $10 to $20 per hundredweight drop in summer fed cattle prices.
With the concern of steak being replaced by burger, there has been some talk in the industry that the U.S.’s advantage of producing high quality beef may be a strategy better suited to the past, and we should no longer focus on producing such high quality beef.
I whole-heartedly disagree with that opinion.
Our advantage is in producing high quality beef. Other countries can produce burger efficiently, but our customers – both domestic and globally – want high quality U.S. beef. If consumers did not want high quality beef, the Choice-Select spread – the difference in the wholesale boxed beef cut-out values for USDA’s choice and select grade carcasses – would disappear. The fact that wholesalers are willing to pay more for choice carcasses is a direct reflection that consumers are also demanding high quality beef.
The figure to the right below shows the Choice-Select spread per hundredweight over the last decade. The difference dipped a bit during the recession, but seasonal highs have been equivalent with pre-recession levels for the last few years. Last week’s average was $10.72 per hundredweight, and we usually see a spike in the summer grilling months. I would also argue that we can easily fill burger demand with high quality carcasses. The majority – over 85 percent – of the Choice-Select spread can be attributed to the middle primal cuts, or the loin and rib, and there is very little difference in the value of other cuts between choice and select carcasses.
We also need to be worried about impacting global demand for U.S. beef if we do indeed try to lower quality as a means of lowering our costs of production.
I think everyone is aware of how important exports are to our industry. Again, these consumers choose U.S. beef over other sources, as we are known for quality.
While many people are aware that we send a lot of offal overseas, some may be surprised to know that the value of first, beef and veal, and, secondly, hides and skins, with each category accounting for roughly $1.5 billion, sent across our border actually exceed the value of offal exported. A recent report from Paul Clayton at Kansas State University states that while export volume grew by seven percent from January 2013 to January 2014, the value of those exports actually grew by 15 percent.
So, in all, I think the industry is wise to continue to do what it is doing, leading the world in high quality beef production. I do agree that we need to keep an eye on costs, as at some point we can expect consumers to substitute from burger to other protein sources if the price differential swings too far.
However, I think it is clear that consumers do desire high quality beef or else we would not continue to see the price differential between choice and select carcasses. So, we should not cut costs to the point that quality suffers.
I would caution, however, that annual cow profitability will likely decline over the next few years as rebuilding occurs.
So, I hope all of you do have a profitable year, but I also encourage you to plan for the future and save some of this year’s hopefully plentiful return as a cushion for the next downturn. Let’s face it – between the weather and global politics, a hiccup to beef markets could unfortunately happen at any moment.