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Published September 09, 2013, 10:40 AM

Pricing disconnect

Consumers during Labor Day weekend may have experienced some sticker shock over the price of beef.

By: SDSU Extension Service, SDSU Extension Service

BROOKINGS, S.D. — Consumers visiting their local meat counter to purchase steaks and hamburgers for grilling during Labor Day weekend may have experienced some sticker shock over the price of beef and thought cattle producers must be making a lot of money. They would have been correct about the first part, but not the second, says Darrell Mark, adjunct professor of Economics at South Dakota State University.

“Retail prices have hovered near record highs for several months. In fact, according to the most recent figures, in July retail beef prices averaged a record $5.357 per pound. That same month, fed cattle prices only averaged $1.19 per pound,” Mark says.

As a result, he says the spread between the retail value of beef from a carcass and the live animal was quite wide in July 2013.

“In fact, this live-to-retail price spread was record large in July at about $1,253 per head,” Mark says. He notes that this estimated spread is calculated using average carcass yields of beef. “It also includes the value of hide and offal products that are sold, which were also record high in July.”

The live-to-retail price spread has averaged almost $100 per head, or 9 percent higher in the first seven months of 2013, compared with the same time period last year.

Dissecting the live-to-retail price spread into margins before and after beef harvesting and processing can help identify what segments of the industry are profitable (or not profitable). The live-to-cutout processing margin averaged about $169 per head in July, suggesting that beef packers with “average” costs would have been making less than $20 per head. Seasonally, July is the month with the widest live-to-cutout processing margin. In the first four months of the year, the packer gross margin averaged close to $90 per head, which would have been unprofitable for most packers and processors.

The difference between the wholesale value of the beef sold by packers and the retail value at the supermarket is the gross margin that the retail industry has to cover its costs to market beef to consumers. In July, this cutout-to-retail price spread averaged a record $1,085 per head. From January to July 2013, this spread averaged $1,031 per head, almost $85 per head higher than the same seven months in 2012.

Maintaining profit margin

“Based upon the estimated gross processing margin for a beef processor and the marketing margin for retailers, it appears that the majority of the profits available from beef sales are currently being held at the retail level,” Mark says.

He explains that a couple of factors contribute to retailers’ ability to keep these profits.

“First, retail prices tend to be fairly sticky and once prices go up, they don’t tend to come down very quickly or vice versa because consumers generally dislike extreme price variability — especially of the magnitude that ag producers deal with in the commodities markets,” he says. “Second, beef packers and processors have generally been unable to push boxed beef prices much beyond $2 per pound this year for a sustained period of time. When they have, retailers tend to switch features to competing meats, which are growing in supply.”

He adds that the cattle feeding industry hasn’t been earning a profit this year either.

“Losses to cattle feeding (on a strictly cash basis) have averaged nearly $160 per head so far in 2013. It has improved in recent months, but the $1.19 per pound average fed cattle price in July still resulted in average losses for that month around $82 per head,” Mark says.

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