Consumer beef demand going forward will depend largely on the larger economy and the status of economic support in the wake of pandemic disruptions, said Oklahoma State University Agricultural Economist Derrell Peel in a letter to Extension agents called Cow/Calf Corner.
The economy was wracked like never before in the first half of the year, disrupting supply chains and cutting consumer incomes, Peel said. Economic support from the federal government has helped support beef buying, but more will be needed to keep it up.
SUPPLY, DEMAND DISRUPTED
Demand for any product is a function of consumers’ willingness and ability to purchase specific quantities of the product at various prices.
The Bureau of Economic Analysis released preliminary estimates showing second-quarter US Gross Domestic Product declined by an unprecedented 32.9% from the 2019 period, he said. This followed a 5% first-quarter decrease compared with last year.
First-half demand was difficult to judge accurately as surging retail grocery demand was offset by sharply diminished food service demand, all obscured by temporary supply shortages that reduced overall beef availability, he said.
Record wholesale and retail beef prices also masked conditions in various markets related to product demand and the ability to shift product from food service to retail grocery, he said.
Beef supply conditions have stabilized, at higher levels of production year over year, Peel said, so demand will be critical in determining overall beef and cattle prices going forward.
DEMAND EXAMINED
Underlying consumer preferences determine overall beef demand, Peel said. Tastes and preferences tend to be relatively stable over longer periods and beef popularity remains strong.
In the short run, willingness to purchase beef will depend on the relative prices of other products, particularly substitutes, he said. For specific beef products, this is a complicated consideration.
In periods of low income, beef consumers may “trade down” from high-cost beef products to lower-valued products, Peel said. Food service demand, which remains diminished, will emphasize this effect going forward.
INCOME NEEDED
Ability to purchase a product is related to the level of consumers’ discretionary income, he said. Consumers must have income to purchase a product regardless of how much they desire it.
Macroeconomic conditions, including GDP and unemployment indicate income levels, Peel said. The US economy is in recession and likely will be into next year. Unemployment peaked at 14.7% in April before declining to 11.1% in June.
Unemployment is expected to decline but will remain elevated in the second half of 2020, he said. GDP is projected to be lower for the remainder of the year with annual estimates down by a range of 6.5% to 8.0% year over year.
In the first half, federal stimulus and unemployment benefits partially offset the effect on consumer incomes of the drop in GDP and increase in unemployment, Peel said.
Macroeconomic conditions and the status of economic support will play a key role in overall beef demand going forward.
CATTLE, BEEF RECAP
Fed cattle trading was reported this week at $99 to $102 per cwt on a live basis, up $2 to $4.50 from last week. Dressed-basis trading was seen last week at $160 per cwt, up $2 from the previous week.
The USDA choice cutout Wednesday was down $0.67 per cwt at $203.57, while select was up $0.37 at $190.82. The choice/select spread narrowed to $12.75 from $13.79 with 109 loads of fabricated product sold into the spot market.
The CME Feeder Cattle index for the seven days ended Tuesday was $140.60 per cwt, up $0.10. This compares with Wednesday’s Aug contract settlement of $144.80, up $0.10.