Go ahead, throw another T-bone on the grill!
Thanks to a boom in beef production, steaks and burgers will finally be cheap enough this summer to rival pork and chicken. The surge in output means the U.S. is headed for a meat bonanza. Americans will eat 8 percent more red meat and poultry per capita this year compared with three years earlier -- a record jump in government data going back to 1970. Beef, in particular, is expected to see increased consumer demand as prices in grocery stores drop, making the meat more competitive.
Retailers and restaurants are loading up on beef supplies, signaling that customers will enjoy summer promotions. Adding to the demand outlook is recent news that the U.S. may be getting closer to restarting trade with China, the world’s second-biggest beef buyer, opening a market that’s been shut since 2003. The brightening picture is drawing the attention of hedge funds, who have the most bullish holding on cattle futures since June 2014.
“If you lower prices enough, you can get products sold not just in the near term, but for the next three to five months. For two or three years we were in a situation where beef went up and up, and it became difficult to run full promotions. Suddenly, the market switched and allowed more operators to do that.” - Altin Kalo, an analyst at Manchester, New Hampshire-based Steiner Consulting Group
Rising beef consumption is sparking a rally for cattle prices, as traders anticipate that meat packers will need a steady stream of the animals. June futures climbed 2.6 percent to $1.147 a pound last week on the Chicago Mercantile Exchange, after reaching $1.15525, the highest since the contract started trading in February 2016. They rose again Tuesday, gaining 0.4 percent at 8:41 a.m. in Chicago.
Money managers are gearing up for more gains. The cattle net-long position, or the difference between bets on a price increase and wagers on a decline, climbed 1.9 percent to 123,372 futures and options in the week ended April 11, according to U.S. Commodity Futures and Trading Commission data released three days later.
"Demand is picking up as retailers have responded to better wholesale pricing with aggressive beef promotions. Beef is seeing its highest share of total advertisements for the three main meats, including chicken and pork, in seven years" - CoBank, analysts at Greenwood Village, Colorado
Ground beef in grocery stores has dropped about 9 percent from a year ago, the most recent data from the U.S. Bureau of Labor Statistics show. Steaks are down 6.6 percent. While pork and chicken are typically less expensive than beef, the gap between the prices is narrowing. Steak’s premium over pork chops is down 6.5 percent from a year ago.
Above-average temperatures, favorable to grilling, and strengthening consumer confidence are also helping demand. As of April 7, the four-week average of beef sales for delivery between 22 and 60 days out was 34 percent more than a year earlier, according to U.S. Department of Agriculture data compiled by Steiner Consulting. The trend of higher sales has persisted all this year.
Optimism that China will soon buy U.S. beef is also fueling bulls. President Donald Trump’s administration called it a “big prize” after he and Chinese President Xi Jinping agreed to expand American shipments to the country during a meeting this month. China lifted its 2003 ban in September, but difficulties negotiating conditions attached to the re-opening of trade have held up sales. Even without China, beef exports have chipped away at bigger domestic supplies, with volumes in the first two months of the year up 13 percent, according to the latest government data compiled by the U.S. Meat Export Federation.
An expanding herd and robust slaughter numbers are also deceptive -- supplies are actually tight when looking at market-ready cattle, or those that have been fattening up for months in feedlots and are ready to be bought and processed. The number of animals on feed for more than 120 days was 16 percent lower on March 1 and may be down as much as 12 percent for April 1, according to Kalo of Steiner Consulting. Even with booming demand and near-term supply tightness, the futures curve signals price declines in the longer-term. Contracts through the end of the year are trading at a discount to June futures.
"Output will catch up with demand, and production of other meats will continue to expand, pressuring prices. I don’t think there’s so much bullishness going into the end of the year. There’s going to be some herd expansion, and there’s the realization that there’s going to be larger pork and poultry supplies. That’s why the bullishness is only near term.” - Donald Selkin, the New York-based chief market strategist at Newbridge Securities