Demand a Big Factor In Rising Beef Costs

AMY SUNG

Wholesale beef prices, especially premium cuts, are climbing steadily this year, according to the U.S. Department of Agriculture's Economic Research Service.

Industry experts say the upsurge is due not only to a spike in production costs — led by sharp increases in prices for corn-based feeds and diesel fuel — but also to growth in demand for beef in both domestic and foreign markets.

According to ERS' composite retail prices for Choice-grade beef in April 2007, beef prices were at $4.29 per pound, a 4.7% increase over last April. Prices have been increasing steadily this year, with April experiencing a 1.8% increase, following a 1.4% increase in March and a 1.3% increase in February, according to ERS' monthly analysis of the Consumer Price Index for food. April's increase was due in large part to a 2.7% increase in beef steak prices.

The ERS analysis attributes the bulk of the rise to higher corn-based feed costs, but several industry observers said other factors may be having more of an impact, particularly on premium cuts.

“These past two months were considerably ahead of where we were last year, but we still haven't set any records yet, which was set at $4.37 back in November of 2003,” said Bill Hahan, ERS economist for the USDA.

“The expensive and Choice cuts have tended to be moving up pretty sharply so far this year, and ground beef has actually moved up too. Some people have been blaming the corn prices being so high, but I'm a little skeptical of that myself.”

Hahan said he believes it will take a couple of years for the higher corn prices — pushed up by federal mandates for increasing ethanol production — to really have a big impact on cattle production, because herd building is so cyclical in nature, and it takes time for cattle supply decisions to be made and implemented.

“Price increases can be linked to a lot of factors, and it's an oversimplification to just point at certain production costs, saying that's why the beef in the meat case is more expensive than it was a few months ago,” agreed Joe Schuele, spokesman for the National Cattlemen's Beef Association, Centennial, Colo.

“There are a number of production costs that are at historic highs, corn being one and hay and diesel fuel being others. These are all things that are costing cattle producers a lot more than it did in the past, but the thing to remember is that the reason why raising cattle is a tough business is that you don't just get to pass along increased costs to the consumers.”

Instead, wholesale costs for premium beef are up partly because demand is up, Schuele said.

“People sell higher-end cuts of meat for what the buyer is willing to pay. And if the marketplace right now is rewarding producers of higher-quality cuts of meat, that's the way the market is supposed to work. But as producers respond to that and start generating their product accordingly, prices are going to moderate,” he predicted.

“We're frankly not really seeing major changes in production prices, even as corn is going up and other feeds have gone up. The experts are telling us that cattle are spending pretty much the same number of days on [finishing] feed as they have in the past, so I don't think you're seeing major production changes; I just think you're seeing stronger demand for higher-end cuts of meat, and where there's strong demand, prices will follow accordingly.”

Schenectady, N.Y.-based Price Chopper carries Choice beef, as well as Certified Angus beef, and has seen increased costs but has not yet transferred the rise to its retail pricing.

“The costs are going up, but we've not raised our regular pricing, though our features have been less aggressive in recent weeks due to the cost increase,” said Mona Golub, spokeswoman for Price Chopper.

Golub also told SN that if costs continue to rise, Price Chopper will have to consider raising prices at the retail level — something many other retailers may be considering soon, noted Hahan.

“Given that wholesale prices have been fluctuating high-ish in the past few months, as long as they stay relatively high, I think we'll see several more months of increasing retail prices,” Hahan said.

“The supply-and-demand type things are always important — the economy's been fairly good, so it's boosted up demand for the higher-end products in beef,” he added.

Schuele agreed that the demand side of the equation has to be given just as much attention as the rising production costs.

“Domestic demand tends to spike a bit as we go into the grilling season — beef has a lot of appeal for people,” Schuele told SN. “In many areas, Memorial Day is seen as a kickoff point to the grilling season, so beef demand tends to hit a bit of a spike, so domestically, that is a factor.”

Increased beef exports are also a factor, Schuele said. “We pushed exports last year back up over $2 billion, and that's only half of where we were in 2003, but it's a big step up from where we were a couple of years ago. So whenever we can build overseas demand, that helps our producers command a better price for cattle, because we're pushing product out to a whole new range of consumers.”

Poultry and pork producers have been impacted more heavily by the rising price of corn this year, SN has reported, because they do not have the option of using forage, distiller's grain or other ruminant feeds while raising their flocks and herds.