Where’s the (ground) beef?
April 28, 2016
Weakened sales in the ground beef market keep analysts guessing.
Something is amiss with the US beef industry’s most ubiquitous product, ground beef. Sales have been weaker than expected for 18 months. That’s of deepening concern because ground beef as hamburgers and in all its forms is by far the most widely purchased beef item in the US at both the retail and foodservice segments.
Recent data reveal how important the product is.
Ground beef currently accounts for 55 percent of all beef sales in the US, with its sales divided 50/50 between the retail and the foodservice sectors.
At retail, consumers purchase twice as much ground beef as any other beef item. It accounts for 49 percent of total retail beef sales volumes and 39 percent of revenue.
At foodservice, ground beef accounts for 63 percent of volume and 37 percent of revenue.
Hamburgers account for nearly 30 percent of total ground beef use. Not surprisingly, three of the top five restaurant chains in the US are hamburger chains. Of the 400 largest restaurant chains in the US, hamburger chains account for 33 percent of total sales dollars.
This level of consumption means manufacturing boneless beef, the raw product used to make ground beef, is by far the largest single product at the wholesale level. It accounts for approximately half the total annual beef supply when both domestic and imported sources are combined. The majority of this manufacturing beef is processed into a number of ground beef products.
This market dominance makes the ground beef processing industry arguably the most significant sector of the US meat and poultry industry. It is certainly one of the largest sectors in terms of production volumes of a single meat category. The ground beef processing sector is dominated by a handful of major companies, reflecting consolidation in the meat processing industry over the past 15 years.
Dividing the market
Ground beef processors fall into two groups. The first is those companies (packers) that primarily slaughter and process fed and non-fed cattle and are also major producers of ground beef. The second group is those companies (grinders) that buy supplies of manufacturing beef, both domestic and imported product, and further process that raw material into a variety of products for end users.
This differentiation between packers and grinders is clearly seen in the types of products that various companies make. In general, packers specialize in producing and selling coarse and fine grind chubs (fresh) for retail customers, with a smaller amount of the same product going to foodservice. Grinders specialize in producing individually quick frozen (IQF) patties for use primarily in the foodservice sector. Based on historical data from the top 10 ground beef processors, the fresh chub category is by far the largest in the industry. Nearly three times more of this product is manufactured than IQF patties. The next two categories, case ready (MAP) and fresh patties, are only half the size of the second category.
Traditional ground beef products such as fresh ground beef for retail sale and individual quick-frozen patties for foodservice sale dominate the market.
Americans enjoy ground beef in numerous forms. The top uses of ground beef as a percentage of ground beef servings, according to market research data, are hamburgers (29 percent), spaghetti (14 percent), Mexican dishes (9 percent) and casseroles/helpers (8 percent).
These data, plus a breakdown of product type manufactured by major ground beef processors, suggest that traditional ground beef products such as fresh ground beef for retail sale and IQF patties for foodservice sale dominate the market.
A relatively new category, case ready (MAP), appeared in the early 2000s in response to retailers’ desires to move away from producing fresh ground beef in-house. This desire was motivated by food safety concerns, a focus on more consistent product quality through centralized processing, consumer convenience, retail labor shortages, efforts to reduce product shrink and loss of out-of-stock sales, and other factors. Recent record-keeping requirements introduced by the US Dept. of Agriculture will likely increase the use of case-ready or MAP ground beef by retailers.
The price was right
Ground beef has also been the beef industry’s most important product for many years due to price. Fresh ground beef at retail consistently was competitively priced with pork and chicken items. Patty prices at the foodservice level allowed hamburger chains to dominate the restaurant industry.
However, fresh ground beef at retail began to become less competitive as supplies of domestic lean manufacturing beef (90CL) began to tighten in 2013-2014. Most retailers sell only fresh ground beef. So the vast majority of frozen imported 90CL beef from Australia, New Zealand and other countries goes into foodservice.
The wholesale price of domestic 90CL began 2012 at new record levels, ranging from $220 to $230 per cwt. But the price fell back in 2013 and some weeks averaged below $200, as beef cows continued to stampede to market due to the effects of drought. That supply began to shrink though in 2014 and the price of 90CL consistently reached new record levels. The first week of September 2014 saw the price exceed $300 per cwt for the first time. Prices backed off somewhat for several months but then posted the current record of $303.51 at the end of January last year.
In response, retailers began raising prices on all their fresh ground beef offerings and featuring ground beef less in early 2014. The result was that the average price of all ground beef, as reported by USDA, exceeded $4 per lb. for the first time ever in August 2014. Retail ground beef sales began to soften after that. Average prices peaked in February last year and have gradually declined. But they remain above $4 and ground beef thus remains expensive compared to pork and chicken.
Meanwhile, the increase in the price of 90CL and an abundant supply of pork and chicken also caused hamburger chains and other quick-service restaurants to diversify their menus away from beef.
A breakdown of retail ground beef categories in 2015 reveals that the only category priced below $4 was the 70-77 percent lean category. Its price averaged $3.91. It was no surprise that sales dominated at $1.4077 billion, with volume sold at 1.044 billion lbs. Next is the 78-84 percent lean category with an average price of $4.07, with sales of $2.445 billion and volume of 600.4 million lbs. The 90-95 percent lean category was third with sales at $1.987 billion. It sold only 381 million lbs. but its average price was $5.21. The leanest category (96-100 percent) had an average price of $6.31.
Retailers featured ground beef aggressively this January, with feature prices at $1.99 per lb. for the first time in several years. Average feature prices of the main categories were all down sharply from the year before. The price of 70-79 percent lean was down 21 percent, the price of 80-89 percent lean was down 16 percent, the price of ground chuck was down 12 percent and the price of 90 percent plus lean was down 13 percent. Despite this, retailers say sales were disappointing and have continued to be soft since then.
“Ground beef is a staple in the diet of most US consumers and we’ve recently seen encouraging trends, including a resurgence for premium gourmet burgers.” — John Keating, president, Cargill Beef
Theories abound as to why retail ground beef sales are performing poorly compared to years past. One is that consumers became a little tired of ground beef after having to trade down to it from more expensive beef items during the 2009-2010 recession. They began to eat more pork and chicken, especially as their production increased and thus became much cheaper than beef. Ground beef was no longer consumers’ “go-to” protein, even in hamburger form, analysts say.
Pork production in 2015 exceeded that of beef production for the first time (24.488 billion lbs. versus 23.700 billion lbs.). Chicken was far ahead at 40.085 billion lbs. Forecasts are for beef production to increase 3 percent or more this year. But pork production might increase another 2.5 percent, as might chicken production. So beef will remain third in terms of production.
It is becoming increasingly clear that pork and poultry are the proteins that compete primarily with ground beef, not beef whole muscle cuts, says economist Nevil Speer. “In other words, the retail beef case may be challenged most by pork and poultry in the ground beef section, not across roasts and or steaks. As such, we may begin to witness greater pricing diversion across the beef categories going forward in 2016.”
The price of domestic 90CL has strengthened this year, advancing every week to an average of $214.99 per cwt the week ended March 5. But this was still 26.5 percent below the price of the same week last year. The price of fatty trimmings (50CL), which also go into the ground beef supply, increased sharply that week to average $66.72 per cwt. But this was 25.6 percent below last year. The price increase however was supply not demand related. Year-to-date cattle slaughter was down 1.1 percent on last year, through March 5 and imports, notably from Australia, were down sharply.
Future is bright
Ground beef giant Cargill Beef however sees a bright future for ground beef and it’s putting its money where its mouth is. It announced at the start of March that it was acquiring the FPL Food, LLC ground beef processing plant in Columbia, South Carolina. Terms of the purchase were not disclosed and the transaction was expected to close around the end of March.
“Cargill ground beef customers served by this plant will benefit from closer proximity to supplies and improved transit time for their orders,” said John Keating, president of Wichita-based Cargill Beef. “This acquisition underscores our ongoing commitment to grow our protein business and will enable us to better serve retail and foodservice customers in a region where people love ground beef.”
Cargill described its North American beef business as one of the largest producers of ground beef products in the world, with numerous processing plants in the US and Canada. This author’s data suggest Cargill can produce more than 5 million lbs. of ground beef products per day or more than 1.2 billion lbs. per year. This puts it well ahead of second largest ground beef producer Tyson Foods and third largest JBS USA Beef.
“Ground beef is a staple in the diet of most US consumers and we’ve recently seen encouraging trends, including a resurgence for premium gourmet burgers,” Keating says. “Rebuilding the US beef cattle herd from the severe multi-year drought suffered in Texas and the southern plains is well underway, which will result in an increased beef supply later this year and beyond. The increased supply should benefit our customers and consumers over the next few years.”
Keating also notes that forecasts say global beef demand continues to increase significantly and that US demand is solid. Cargill though and all others in the ground beef business will be hoping that the onset of the grilling season this month will boost the ground beef market at the wholesale and retail levels.