IN order to remain competitive in the protein market, the beef industry needs to adjust the way beef is produced to respond to changing consumer preferences, according to "Ground Beef Nation," a new report from the Rabobank Food & Agribusiness Research & Advisory group.
For more than 40 years, Americans have consumed an escalating amount of ground beef.
As the Millennial generation moves into the driver's seat on food decisions, convenience and affordability make ground beef fit nicely as an important piece of the marketing puzzle.
However, the U.S. cattle industry's current infrastructure, which pays a premium for high-producing cattle, may put the beef industry into a losing market position.
"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," Rabobank cattle economist Don Close noted. "The industry is, essentially, producing an extraordinarily high-grade product for consumers who desire to purchase a commodity.
"More than 60% of U.S. beef consumption is ground product," he added. "If the U.S. cattle industry continues to produce ground beef in a structure better suited to high-end cuts, the result will be continued erosion of market share."
As competing proteins — especially pork and chicken — increase their production efficiency and provide more ready-to-eat products at a competitive price, beef may wind up pricing itself out of the protein market if a modification to the production model is not made.
Close said when looking at the steady increase in eggs set and chick placements in 2013, combined with the security of a good corn crop, the broiler industry was, without a doubt, positioning itself in 2013 for growth this year.
Likewise, the economic environment is just right for an increase in pork production. However, porcine epidemic diarrhea virus will curtail that growth, which could benefit the beef industry.
Still, the fact remains that beef consumption has dramatically declined in the U.S., with cost — rather than quality — being the driving factor for the downward spiral.
According to the Rabobank report, over a 13-year period, prices increased 2% per year for chicken and 2.7% per year for pork, while beef prices rose 4.6% annually during the same period (Figure).
As a result, those relatively high retail beef prices at a time when Americans have been dealing with a recession has forced consumers to buy fewer high-end, high-quality middle meats.
According to a beef checkoff study, domestic beef consumption in 2012 was just over 15 billion lb., with 57% consumed as ground product.
Nevertheless, utilizing the data from the beef checkoff and Rabobank retail beef sales research, Rabobank estimated domestic consumption of ground beef to be closer to 62%, according to the new report.
Even so, the beef industry can remain competitive if a shift in the production model occurs.
"The industry must change to a production model that determines the best end use of an animal as early as possible in order to compete in a ground beef nation," Close explained. "A new system for end use categorization that influences calf selection, cattle management, production costs and feeding regimen throughout the life of the animal is vital to keeping beef competitive with other choices at the meat counter."
Consumers who focus on cost and convenience will purchase ground beef if the price is right.
Tight cattle supplies and lower feed costs are prompting herd rebuilding, which will place limits on increasing lean beef supplies.
Rabobank estimates that the beef cow slaughter rate will see a double-digit year-over-year decline in 2014 and possibly again in 2015.
However, the production cycle for beef makes it a slow train to leave the station when it comes to growth, Close noted. Beef production is forecasted to see only a 1% increase in 2014 and possibly a 2% uptick in 2015, but weather-related issues may still hinder overall growth for the U.S.
Consequently, the industry will have to slaughter more cows and bulls, import more lean beef or grind more whole muscle cuts from the fed beef supply.
High prices in the beef market in the fourth quarter of 2013 were the result of a "perfect storm" of a combination of factors that, according to Close, included tight feeder supplies with short inventory for both packers and retailers, coupled with constant problems in transportation infrastructure due to weather.
Consequently, the markets over-responded in the short term, making a run from $140 to $150/cwt. in cattle a couple of weeks ago.
It is likely that beef prices have topped out, but the setback in cutout prices in the last week to 10 days shows the correction. The Choice cutout price dropped from $220.09 at the start of last week to $213.51 by last Thursday's close. The spread between the Choice and Select cutout values has narrowed, with only a 1-cent difference at last Wednesday's close.
Close said with beef prices at such high levels, there will be at least temporary demand erosion that will cause ripples throughout the system.
"Looking at temporary demand destruction, I think the really interesting question is just how fast wholesale beef prices and cattle prices will respond to stabilize that demand basis," he added.
The cattle market could be healthy if the response happens between now and March, but if it stretches into grilling season, then it will be a tougher issue to work through, Close explained.
The U.S. Department of Agriculture's National Agricultural Statistics Service Jan. 31 "Cattle Inventory" report indicated 87.73 million cattle in the U.S. herd at the start of the new year, a decrease of 1.8% from a year ago and lower than pre-report estimates.
In addition, the 2013 calf crop, at 33.93 million, was down 1.0% from 2012 levels. The number of heifers held for cow replacement increased 1.7% to 5.381 million — a third year of growth — signaling the start of cow herd rebuilding in 2014.
Last Thursday, fed cattle prices dropped on the assumption that demand has started declining due to record beef prices and winter storm events that have kept U.S. consumers home, according to Farm Progress analyst John Otte.
Editor's Note: Listen to an interview with Close for the "Feedstuffs in Focus" podcast at www.Feedstuffs.com.
In the dairy markets, cheddar cheese blocks started last week at a new record of $2.36/lb. but dropped 3 cents by the close of the markets last Thursday.
Similarly, block cheese also was at an all-time high last Monday, reaching $2.32/lb., but then declined 2 cents last Thursday.
According to Rice Dairy analyst Katie Krupa, the market was relatively unchanged last week and appeared to be taking a breather, with Class III and Class IV futures showing some red for the first time in many weeks.
Weather limited the movement of hogs last week, and packers have no motivation to increase pork inventories with light demand. However, that is expected to change with the recent slip in beef cutout prices.
Hog slaughter last week was 423,000, up 104,000 from last week but down 15,000 from the previous year.