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CME: Retailers Look to Capitalise on Beef Demand to Boost Margins

21 January 2019

US - The USDA Economic Research Service (ERS) has not been able to publish the latest retail prices for beef, pork and poultry due to the ongoing shutdown. But we can glean some information about beef and pork price inflation based on consumer price indexes published by the US Bureau of Labor Statistics, writes Steiner Consulting Group, DLR Division, Inc.

Below is a brief recap of the latest CPI data on beef as well as some insights on the start of 2019 based on the AMS retail feature survey:

The seasonally adjusted consumer price index (CPI) for beef and veal in the US in December was 302.89, 0.6 percent lower than a year ago. For all of 2018, the average CPI for beef and veal averaged 302.58, 1.4 percent higher than the previous year.

Retail beef prices were higher in 2018 despite an increase in US beef production suggesting good beef demand. According to the December USDA estimate, total US beef production last year was 752 million pounds or 2.9 percent higher than the previous year.

But just because beef production went up does not necessarily mean that the average US consumer purchased and ultimately consumed more beef. US beef exports were up 330 million pounds or 11.5 percent compared to the previous year while imports were marginally higher.

In addition one needs to consider that population growth means more meals are consumed each year than the year prior. So as the last USDA WASDE report noted, per capita beef consumption in 2018 was up just 0.2 pounds per person or 0.4 percent despite the 2.9 percent increase in beef production.

Still, higher retail beef prices even with this modest increase in per capita supplies suggest robust beef demand. Indeed, talk of this excellent demand keeps percolating in the market and futures certainly reflect that.

What should not be lost, however, is the fact that exports were a big part of the story in 2018 and will be once again critical for the market in the new year. The risk sometimes is that participants overestimate demand, pushing up prices to levels that ration out supplies even production continues to expand. Consider the chart below.

It shows the average feature price of 80-89 percent ground beef as reported by USDA-AMS in their weekly survey results. In the first two weeks of the year, feature prices for this category of ground beef were up 12 percent compared to a year ago.

Could this be the reason why the quantity of ground beef demanded early in the year has not been as strong as some expected? The price of 50CL beef trim, a product mixed with lean product to make various meat blocks, has been stuck in the low 60s, about 10-15 cents less than one would expect based on cattle values.

So while competition from other proteins may also be the issue, it appears that retailers are looking to capitalise on beef demand, real or imagined, to boost their margins. The round primal value has been lower so far this year.

And yet, about 86 percent of the round beef features tracked in the first two weeks of 2019 had higher prices than the year before. In the case of beef chucks, retail prices were higher for 84 percent of features, with the average price up 5 percent compared to the previous year.

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