Elevated meat prices in the US for the rest of the year - CoBank
Over the past two years, ever-changing consumer behavior has buffeted the food sector. Initially, consumers responded to the pandemic by stocking up on grocery shelf staples and avoiding sit down dining. As COVID outbreaks ebbed and flowed, so has consumer restaurant spending. But, during the entire time retail meat demand has remained steadfast. These unprecedented changes in spending patterns have proved extraordinarily difficult for livestock producers, meat processors, and consumer-facing channels.
The shift in spending was most notable during 2020. Consumers, flush with cash from federal stimulus and facing ongoing dining restrictions, had more spare time and money to spend on cooking at home, and retail meat and poultry spending jumped nearly 20% in 2020. However, when dining restrictions did ease in the first half of 2021, retail meat spending defied expectations and held steady. And just as consumers were gaining optimism in the second half of 2021, the omicron variant spiked COVID-19 cases and curtailed restaurant spending yet again. Weary of dining restrictions, consumers who wanted to replicate restaurant-like experiences have invested heavily in home cooking. According to the NPD group, US consumers spent $6.1 billion across the grilling segment in 2021, a 14% uptick from 2020, with peak (March-May) grill and smoker sales volume up 80% from pre-pandemic levels. Consumers’ access to high-quality meat has been instrumental in retaining the consumer dollar at retail, specifically access to better-quality beef – more than 80% of beef was graded choice or higher during 2021.
Red meat production dropped
These shifting demand patterns and market uncertainties have played a major role in higher and more volatile meat and poultry prices, but that is only half of the story. Looking more in depth at the supply side, over the past decade the US increased animal protein production by 16%. Yet the past few years paint a different supply picture. The temporary closure of beef and pork plants in 2020 has led to backups in fed cattle supply that still linger today. Combined with the ongoing severe drought conditions in the Western US amid the backdrop of modest feeder calf prices, the nation’s beef cattle inventory remains in decline. The combined cow and replacement heifer inventory has dropped by a whopping 12% since 2017. Likewise, the nation’s sow herd is contracting and is down nearly 6% over the past three years, primarily due to losses sustained in 2018-19, prior to the pandemic. USDA is forecasting a 2% decline in U.S. beef and pork production in 2022.
Broiler production expanded rapidly from 2013 to 2019, up some 2.4% annually on average. In contrast, during the most recent two years, (2020-21) annual broiler meat production growth averaged just 1.1%. Factors at play include uncertainties regarding the future of food service, high feed costs, ongoing chick survivability, and Highly Pathogenic Avian Influenza sweeping through US commercial poultry. Overall, USDA expects minimal growth for chicken production, up just 0.7% in 2022. The bottom line is that slightly higher poultry production and slightly higher red meat imports will leave the domestic meat and poultry supply essentially unchanged in 2022.
Higher meat prices expected
Animal feed prices have skyrocketed from where they sat in 2020 as global grain balance sheets tightened amid smaller global harvests in 2021 and now by the Russian invasion of Ukraine. The invasion shocked grain markets and sent grain and oilseed crop prices up 20%-30% in a matter of days. Although feed is the largest variable cost to livestock production, it is not the only cost: Labor and energy also represent major expenses and both of those have been rising steadily as well. The sharply higher costs for feed, and energy in particular, have yet to fully impact wholesale and retail meat prices. The report also notice that, despite an increase in prices occurred last year, beef demand was steady and chicken continues to enjoy strong consumer demand as well. However, for 2022, a flight to safety from higher meat prices may be to feature value items like ground beef, hot
dogs, and sausage items.
"Price volatility across the animal protein sector has become a daily headache for procurement teams to manage. While prices started 2022 in post-holiday doldrums, wholesale values were still elevated compared with pre-pandemic levels. Volatility in wholesale markets remains an obstacle for promotional planning. With combined cutout values of beef, pork, and chicken climbing 22% YoY for the first quarter of 2022, the consumer is all but certain to see higher prices in the meat case," commented Brian Earnest, Lead Economist, Animal Protein, CoBank.
Given the strength in the markets during the first quarter of 2022, there is a high probability that wholesale prices will remain supported through the balance of 2022. USDA is currently forecasting livestock prices up 10% YoY for 2022 overall. Surprisingly, as dining restrictions have eased over the last 12 months, retail channel support has seen minimal contraction. With grilling season in mind, it is likely that retail meat department’s focus will shift to profit margins over sales volumes this year, meaning we will see increased creativity in the meat case. Rather than vying for consumer dollars through aggressive price points, “no price” features will be an attractive solution. Additionally, while prices for end cuts have been elevated, grinds show moderate price support, suggesting we could see burgers and all-beef franks more frequently featured during grilling season.
If consumers’ real incomes continue to decline along with higher meat prices, we may finally see a significant change in consumer’s willingness to pay for red meat. If that turns out to be the case, the U.S. broiler industry may yet again be well-positioned for modest growth and strong margins. Even here, however, we do not expect that the opportunity will likely rival the expansive growth that occurred from 2017-20 when eight new broiler plants were built.
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