Where’s the beef?

by Steve Kay
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Hamburger chain Wendy’s International introduced its famous “Where’s the beef?” slogan in 1984. The often-used phrase might turn out to be the catch-cry in the 2012 US red-meat complex because available beef supplies are set to fall this year to 54.1 lbs. per person, according to US Dept. of Agriculture forecasts. This would be down 3.3 lbs. from 2011’s expected 57.4 lbs. and 2010’s 59.6 lbs. It would be the lowest per capita or disappearance figure in at least 61 years.

This tighter supply will set off a scramble for raw materials, notably of manufacturing beef, that will likely result in record-high wholesale prices for most beef items this year. The supply shortage (relative to demand) will be most acutely felt in the ground-beef complex. The hamburger boom since the 2008 recession and the continued growth of specialty hamburger chains will almost guarantee record-high prices for fatty trimmings (50CL from fed steers and heifers) all the way up to lean cow beef (90CL).

These items set new record highs in early November, with 90CL averaging $189.66 per cwt and 50CL averaging $123.44. Another indicator is that a record number of chucks, rounds and sirloins went through the grinder in 2011. These three sub-primals accounted for 36.3 percent of all ground beef sales, vs. 34.8 percent in 2010.

Half of all Americans ate a hamburger at least once a week in 2011, according to research firm Technomic Inc. This was up from 38 percent in 2009. The hamburger boom will likely continue on two fronts. Gourmet burgers costing $12 to $15 will continue to provide consumers with a beef indulgence on the cheap. Such burgers contain everything from brisket meat to Wagyu to Certified Angus Beef. Meanwhile, specialty chains such as Five Guys Burgers and Fries and Smashburger keep expanding. Five Guys had one store in 2002. It now has 800 in 40 states and plans to add 600 more stores over the next two years. Smashburger, founded in 2007, operates 100 stores and says it will expand into Miami and Los Angeles.

Such chains use fresh/never-frozen beef patties and cook them to order. They use a combination of trim and end meats. So, their expansion, as well as that of the long-established chains, will keep prices of those meats high. Prices will also keep rising due to smaller overall beef supplies. US cattle slaughter in 2012 might decline as much as 1.5 million head (with 700,000 fewer cows alone) or by 4.5 percent from 2011.

USDA bases its disappearance number on US beef production falling this year to 25.070 billion lbs., the lowest number since 2005. USDA also assumes imports will increase only slightly from 2011 (to 2.090 billion lbs. from 2.052 billion lbs.) and that exports will be flat (2.775 billion lbs., vs. 2.779 billion lbs. in 2011). Slight relief might come if the US produces more beef (some analysts have the number at 25.6 billion lbs.) and if imports, notably from Australia, are larger than forecast.

Conversely, exports might be larger. The US Meat Export Federation in November forecast that 2012 exports would be up 6 percent on last year. It based its outlook on the US selling more beef to Japan the second half of this year after Japan raises its age limit on US beef from cattle under 21 months to under 31 months. USMEF also expects China to start accepting US beef in the second half of 2012.

Rising price of beef

Any growth in exports will also be predicated on whether global buyers are prepared to keep paying more for US beef and on the value of the US dollar against other currencies. They certainly paid more in 2011. JBS SA, the world’s largest beef exporter, reported last year average export prices from JBS USA (which includes its Australian operations) were up 22.3 percent in its first quarter on the year earlier quarter. Prices were up 21.9 percent in the second quarter and up 19.3 percent in the third quarter. Tyson Foods, the largest US beef packer by sales, does not break out export prices. But its average selling price for all its beef in fiscal 2011 (which ended Oct. 1) was up 16.9 percent from fiscal 2010. Fourth-largest processor National Beef Packing said its average selling price in fiscal 2011 (which ended Aug. 27) was up 16.7 percent.

The possibility of higher global prices looks likely for two reasons. Key Asian markets such as Japan and South Korea will experience positive GDP growth, helping an improvement in beef demand. Second, global cattle numbers in 2012 (at 1.018 billion head) will be up only 0.6 percent and global beef production will remain flat at 56.8 million metric tons, according to an October 2011 forecast by USDA.

What happens at home, however, will be critical to the beef complex this year, as 88 percent of all beef produced is sold within the US. Retailers and foodservice operators last year worked hard to minimize beef-price increases to consumers. But retail prices continued to rise. USDA’s All Beef price for October was $4.50 per lb., up 9.8 percent from October 2010. A similar increase by October this year would put the average price at $4.94. Such prices might meet considerable buying resistance from consumers unless the economy has improved significantly by then.

The decline in per capita beef supplies in 2012 has enormous implications for all in the US beef chain. End users, from further processors to restaurants, will have to compete more for tighter supplies. They will likely have to pay more for all types of beef. Wholesale beef prices are already much higher than a year earlier. The weekly composite cutout the week ended Dec. 3 was $193.92 per cwt, 17.5 percent higher than the same week last year. A similar increase by the same week this year would put the cutout at $227.86.

Packers will need such an increase if they are to have positive margins in 2012, due to another big increase in cattle costs. Live cattle prices in 2011 were up 20 percent from 2010 and will increase 4.5 percent to 11.5 percent this year, says USDA. It forecasts prices to average $120-128 per cwt, vs. $114.85 in 2011. One reason for the price increase is the ongoing decline in US cattle numbers. The national herd shrank in 2011 for the fifth straight year. USDA forecast that the Jan. 1, 2012, herd total would be 91.45 million head, although private forecasts were closer to 91 million head. Adding in Canada’s numbers, the North American herd has declined 3.65 million head in the past three years.

Broiler production poised to fall

USDA also forecasts that broiler production in 2012 will decline more than 2 percent and that per-capita supplies will be 79.6 lbs., down from 83.0 lbs. in 2011. This leaves pork as the only major protein likely to experience larger production and larger available supplies this year. Production is forecast at 23.134 billion lbs., vs. 22.753 billion lbs. in 2011. Supplies are forecast at 46.2 lbs. per person versus 45.7 lbs.

Exports were a huge factor in 2011 being a profitable year for pork processors and hog producers, as they represented 22.5 percent of production. USDA has exports this year flat with last. But they will continue to play an important role. China, as with beef, might prove to be the wild card if it continues to buy US pork at the pace it did in 2011. At home, pork will continue to provide Americans with a cheaper alternative to beef, even though retail prices will likely be record high. Consumers showed signs of chicken “fatigue” in 2011, one reason why retail and wholesale prices were flat and why poultry processors were forced to cut production. But whether consumers are willing or able to keep paying higher prices for beef and pork is the key issue facing the red meat industry this year.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (www.cattlebuyersweekly.com).

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