Beef demand index: Consumers crave quality

More of the best at higher prices. Beef consumers demanded it in 2014, and they’re still on track through the first quarter of 2015.

That’s according to Kansas State University (K-State) economist Ted Schroeder and Cattle-Fax analyst Lance Zimmerman, who created a demand model as a graduate project under Schroeder in 2010 and recently updated it.

Demand for the Certified Angus Beef (CAB) brand kept up a strong pace of growth, especially in the last five years, adding 112 percentage points to reach 229 on a 100-point base. That 129% increase in 12 years was up by more than 20 points from the 2013 mark.

The K-State model uses 2002 as the base year, and showed demand for commodity USDA Choice beef near the 110 level for most of the following years. It jumped to 120 in 2010 before eroding for three years to fall below 100 and recovered to 108 last year.

Zimmerman says Choice demand held up well in early 2015, too.

“The Choice spot market in April was $31 over a year ago with demand up 9%,” he says. “Select beef was up $15 but volume has fallen so much in 2015 that it equates to a decrease in demand of more than 30% from the first quarter of 2014.”

He notes much of the increase in Choice grading, as cattle are finished at heavier weights, just moves marbling up a few points and lifts up what would have been Select carcasses.

“We’re at a point at these price levels where any apparent strength in prices is driven more by a decline in supply than by a demand base,” Zimmerman says.

Schroeder says the soaring demand for CAB is actually volume driven, for the brand has seen 10 consecutive fiscal-year increases in pounds sold.

“It’s a market-share growth brand, with sales volume up some 11% since 2010 while Choice volume declined by 16%,” he points out.

At prices much higher than 2010, the percentage CAB wholesale beef price premium over Choice declined from 4.5% then to 3.5% last year, Schroeder says.

However, Zimmerman notes CAB is an increasing subset of Choice (now accounting for more than 15.2% of it), so the brand’s higher cutout value is helping to lift wholesale Choice prices as well.

Schroeder says grid and formula premiums paid for CAB-qualifying cattle are up by more than 35%, compared to those in 2010-11.

“That’s consistent with this growing demand for CAB, and it suggests packers make sufficient money on the program to where they have become more aggressive about targeting and attracting CAB cattle,” he says. Some of that relates to the option of marketing the 74% of non-qualifying black cattle into other programs “that carry some of the Angus value banner,” he adds.

The demand model shows a combined category of Choice, Branded Choice and Prime, for which demand increased more than 10 points in 2014 to reach 161 on that 100-point index. That was obviously bouyed by the rise in CAB demand, but Zimmerman points out Prime beef has also increased in both price and supply – the latter continuing up 15% in the first quarter of 2015.

Global demand is represented in the model by its use of world per-capita consumption.

“A huge percentage of it is domestic demand, but there are global implications,” Zimmerman says. “Beef prices are up all over the world, and they are value-conscious, too, looking at pork and chicken. White-marbled, grain-fed U.S. beef competes at the higher price point only by virtue of its quality.”

Does retail or foodservice demand play the larger role now?

Schroeder says today’s beef consumers are less price sensitive, after a few peeled away to settle on pork or chicken at lower prices. Demand at the retail level may depend on better consumer education so that they accurately discern the value of CAB versus lower-quality Angus brands.

On the foodservice side, he sees the overall business recovery boomlet leveling off, “with fewer big steak dinners paid for by corporations,” leading that area of demand to plateau.

Zimmerman gives more of an edge to dining out.

“When I first wrote the paper in 2010, retail had led us out of the recession,” he notes. “But foodservice led the way in 2014 and that sector had the best first quarter in 2015 in a long time. With slow and steady growth in consumer buying power and the greater flexibility of menu pricing, I think the tables are turned in favor of restaurants now.”

They agree that overall, demand for CAB can rise again in 2015.

“Recovery in beef demand across the industry started in 2013 with primarily end meats, and not really the cuts we typically hang our hats on,” Zimmerman says. “But CAB demand growth has been for all of the cuts and the brand is positioned well for another good year.”

Schroeder says, “As long as CAB continues to have growing sales volume, and price premiums do not suffer too much relative to Choice, there is no reason CAB cannot continue to have a demand index similar to recent years, though growth may slow in the next year or two.”

The related white paper, “Defining and Quantifying Certified Angus Beef (CAB) Brand Consumer Demand,” updated in 2013, can be viewed at http://www.cabpartners.com/news/research.php.