With cattle inventories at 50-year lows, retailers should prepare for the return of beef price inflation this year
In 2009, supermarket meat departments found themselves in a rare position with regard to beef. The recession had caused a steep drop in restaurant traffic. And, less demand from restaurants meant lower wholesale prices for retail buyers — a great opportunity during a time when an increasing number of shoppers were dining at home.
This year, the outlook isn't as clear. Historically high feed prices in 2008 and weak demand in 2009 were a one-two punch for ranchers and beef producers, who reduced their herds in an effort to save on input costs and get supply back in line with demand.
These efforts have left the national cow herd “at low levels not seen since 1951,” according to the U.S. Department of Agriculture's most recent “Livestock, Dairy and Poultry Outlook,” published by the agency's Economic Research Service. “This, combined with total replacement heifer inventories at levels virtually unchanged from 2009, sets the stage for a potential reduction in beef production in 2010 and beyond.”
Although the report adds that low corn and feed prices might spur higher than anticipated production this year, retailers can probably expect supplies to tighten and price inflation to return during 2010. Tighter supplies will also make the market more vulnerable to temporary price spikes, like the one last month that in one week sent wholesale prices for choice-grade beef up by more than 5 cents per pound, and select-grade up by almost 7 cents per pound.
As one retailer noted, difficult winter weather is playing a role in these increases. Snowstorms throughout the country, and a series of heavy blizzards in the Northeast, led many shoppers to make stock-up trips at the supermarket.
“Right now, what we're seeing in the past month or two is a spike based on weather,” said Scott Nettles, director of meat and seafood for United Supermarkets, Lubbock, Texas. “When you see these kind of weather conditions, you get a tremendous amount of people who put a rush on grocery stores buying chili meat, ground meat and roasts — all the stuff you stay at home and cook. … We were busy; snow always helps our business. But when the Northeast gets a series of snowstorms like that, it can deplete supplies throughout the country.”
Otherwise, a few important factors remain in retailers' favor. The economy is slowly improving, but the restaurant industry is anticipating another sluggish year. The National Restaurant Association's annual industry forecast predicts the sector will face an inflation-adjusted decline of 0.1% this year, after a 2.9% decline in 2009. So, supermarket meat departments will most likely continue to see shoppers who are eating more meals at home. And, flat consumer demand in the restaurant sector should translate into flat beef sales to restaurant buyers.
Last year, this situation benefited retail buyers. Stores in upscale or middle-income areas that were able to up-sell their shoppers with great deals on steaks benefited the most. The National Cattlemen's Beef Association launched its “Middle Meat Mania” program urging retailers to take this route, and NCBA Marketing Manager Shelley Bradway said that the approach paid off for everyone involved.
During the 13-week period ending Aug. 23, 2009, retail sales of middle meat steaks were up 9.6% compared with the same period in 2008. Ad featuring for steaks was also up 2.5% during that period, and front-page ads for T-bone steaks seem to have been particularly effective, helping to boost sales of T-bones by 18.3% during that time, according to Bradway.
With most shoppers still looking to save money, and beef price inflation appearing more likely this year, these promotions may not have the same impact for retailers this summer. However, Bradway noted that NCBA has carried over its Beef Alternative Merchandising program from 2009. Offering retailers manuals and cutting videos, as well as consumer brochures, the program simply suggests five new beef steaks and premium roasts cut from the ribeye, sirloin and top loin.
“It offers convenience, it offers nice portion sizes and more variety. They're smaller — more like a filet — and a lot of times we're seeing our [retail] partners call them a ‘ribeye filet’ or ‘sirloin filet,’” she said. Part of the appeal to shoppers, she added, is that they get a high-quality cut at a low price.
And, for shoppers who are really looking for bargains, NCBA is reintroducing another ongoing program this year — the “Slice 'n Save” program, which encourages retailers to promote and sell whole subprimal cuts at a discount. NCBA is offering retailers consumer brochures, on-pack labels with cutting instructions and a series of instructional Web videos that retailers can link to on their websites.
“It really is a great time for consumers to take advantage of low per-pound prices on beef subprimals,” said Bradway.
Nettles said that he is expecting to see inflationary pressures return this year, not just with beef, but with other commodities. This opinion is shared by many market analysts. Beef producers weren't unique in suffering from sharp declines in demand while feed prices and other input costs were soaring. Poultry and pork producers faced the same challenges, and responded the same way — by slashing production. As a result, USDA is projecting that pork production will be 2.1% below last year, and average prices will be 16% higher than 2009. Due to the shorter breeding and growing cycle for chickens and turkeys, poultry operators can increase or decrease production much faster than pork and beef producers. But, chicken prices have been on the rise as well.
If price inflation returns this year, rising retail prices will present a challenge, with many consumers still struggling through a difficult economy, now accustomed to deep discounts on proteins.
“The economy is still going to be tough, so I think the restaurant business will continue to take a hit. People just don't have as much money to go out,” Nettles said.
“That will give an opportunity to retailers to continue to capture a good portion of that business … But, I think we will see some inflationary pricing. Certain cuts, like middle meats, are going to go up. I think we are going to see a little bit of inflation, which will help us get our [dollar sale] numbers back up, but will probably hurt our ability to increase our pound sales.”