Two percent of payroll

Feb 22, 2013

Beef sales are in a rut.


Fewer people are buying beef and even with smaller fed cattle supplies, the market isn’t responding to lower prices. The beef cutout value toyed around with $2 beef over the holidays but has been in a tail spin since the New Year; the beef cutout was a little stronger last week at $1.83 last Wednesday. However, this industry is far from seeing profitability at the feeder and packer level. We have a demand crisis on our hands.

Everything starts with the consumer and U.S consumers have been under fiscal pressure with rising energy prices and the restoration of the 2 percent payroll tax holiday that was handed out two years ago. Again, the federal government tried to help, but created more pain in the end.

Live cattle prices have had a tough time and both feeders and packers were expecting a smoother ride ahead and eliminating the volume of red ink on their profit margins.

Ironically, the president of the United States has sent a message to every working person in this country that they have to cut their spending by 2 percent, while he has a difficult time cutting federal spending by 2.3 percent, which just may be forced anyway by his administration through the sequester.

Beef demand is officially a big issue. Consumers are adjusting their purchasing habits as they deal with higher fuel prices, 2 percent less income and a bunch of other issues. Unfortunately, beef is one of those products that falls under the disposable income category, which they have a lot less of. Competing with pork and poultry in the meat case is far too familiar and is a battle that is tough to win. Thank God it doesn’t taste like chicken, or pork, for that matter!

Andy Gottschalk at Hedgersedge reported last week that, “While beef cutout values have sustained a significant decline, the cheaper prices have not sparked any significant new buying. This is confirmation that beef demand has weakened significantly since the New Year began. Many reasons can be cited for the weak demand: Smaller take home pay for workers, 32 consecutive days of rising gasoline prices, a significant delay in income tax refunds (which are $20 billion below last year at this time) and general uncertainty about the future. A member of Wal-Mart’s management stated last week that February-to-date sales were the weakest sales in seven years. Millions of shoppers frequent Wal- Mart each day yet store traffic is down and consumers are tapped out.”

Beef slaughter is currently 2 percent below last year’s level and actual beef production is 2.9 percent lower. Packers have had a hard time finding a sustainable production level while attempting to forecast demand levels. Beef featuring at the retail level has been very slow because they have nothing to offer except for higher retail prices. Processing over 600,000 head per week is a big challenge, when it used to be considered a poor production week. Packers were losing $50 per head last week, $10 better than a week earlier because they were able to buy cattle cheaper.

According to Steve Meyer at CME, “While there is plenty of talk about demand problems in the meat complex, particularly for beef and pork, it would appear to us that we have a supply issue. And all the terminology about ‘Weak demand’ continues to miss the point, rather we prefer to talk about rising prices impacting the quantity consumers/end users are willing to purchase. After all, we are trying to get U.S. consumers to purchase more beef, pork and poultry meat than what they did last year while, at the same time, charging them more money for it. You can do that if demand for your product has gone up but, that is a difficult proposition as the economy is stuck in low gear and consumers face higher real taxes (social security tax is up) and higher energy costs (gasoline prices are higher than in 2012).”

Winter is generally a tough time for beef sales and demand is expected to pick up in spring. But whether or not it will pick up to sustainable levels is the big question. Beef supplies are expected to be at their lowest during the second quarter of the year. Last Friday’s Feb. 1 Cattle on Feed report was expected to show that there are 668,000 fewer cattle in feedlots and placements, about even with last year. Supply is not a problem, but demand is getting a little scary. — PETE CROW