Global beef demand will depend on how much consumers will pay

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As beef producers are challenged with higher costs the profit margin could dip if consumers baulk at paying even higher prices moving forward

The perfect storm is about to hit beef producers as they face restocking and herd rebuilding at a time when consumers are turning to cheaper alternatives

Global beef markets remain tight on strong ongoing consumer demand and constrained supply however headwinds are building that could see producers’ margins topple, according to a newly released report.

Up until now, consumers have accepted ever increasing prices for beef at a retail level, but with household budgets stretched, in the short-term consumers may well be pushed past the tipping point.

In its Q1 Global Beef Quarterly, Rabobank the specialist agribusiness bank says while global beef prices remain high – with cattle prices across most key beef-producing regions at their highest levels in five years – cost pressures are building in the supply chain. And this will test the willingness of consumers to continue to pay ‘top dollar’ for beef.

“Over the past two years, retail beef prices have been phenomenal,” the report says, largely driven by strong consumer demand and some supply shocks.

“In Q4 2021, beef retail prices in the US were 23% higher than the five-year average and in China, they were 24% above the five-year average,” it says.

Consumer demand has been high

It has been a great ride until now – but as household budgets are stretched – beef will be a cost saving target for many

Much of this increase in prices has been caused by “demand pull”, Rabobank senior animal protein analyst Angus Gidley-Baird said, driven by increased consumer appetite for beef due to factors including lockdown restrictions, additional disposable incomes from Covid stimulus packages and (in the case of China and African swine fever in pork) limitations on the availability of alternative proteins.

“With beef supply unable to keep up, the increase in demand has created an imbalance in the market and, as a result, beef prices have lifted,” he said.

In many cases, Mr Gidley-Baird said, the increases in retail beef prices have been among the largest in history. And, while beef prices continued to increase through 2021, prices for many other proteins remained stable or contracted.

“While price rises in beef have been dramatic, the fact they have been largely caused by consumer demand has meant they have been accommodated.  That is, consumers have been willing to pay higher prices to continue consuming beef,” he added.

Author of the report Angus Gidley-Baird from Rabobank said Angus-Gidley-Baird said several cost increases for producers will be permanent

Inflationary pressures

However, inflationary pressures are building in the beef supply chain, the report warns, with labour, freight and energy costs among the largest to see increases, along with feed.

A number of these cost increases will be permanent and need to be “accommodated” and passed on into retail pricing, Mr Gidley-Baird said.

“Some of the cost pressures – such as freight, energy and feed – are cyclical and over time are expected to decline, allowing for some easing in 2022. However, several cost increases – those associated with labour and sustainability for example – will be permanent and will need to be accommodated within the supply chain,” he said.

“Further increases in beef prices run the risk of consumers substituting other proteins or reducing their overall consumption. And we are starting to see signs they might be reaching their limit.”

Russia Ukraine

The Q1 report says the Russia Ukraine conflict is not expected to have a major impact on global beef markets, given Russia has a less prominent role in markets compared with five years ago.

Russia only accounts for approximately 5% of global beef imports with its major suppliers being Paraguay, Brazil and Argentina.

However, indirect impacts are possible and could see profit margins slide.

“Increased energy, fertiliser and feed costs as a result of the conflict could all impact the beef supply chain and, with Russia and Ukraine accounting for 29% of global wheat exports, any trade embargoes could pressure feed prices,” Mr Gidley-Baird added.

“The general uncertainty – along with slower global growth and inflation – could also see an erosion of consumer confidence which may result in an easing of consumer demand for beef.”

Australia stands alone

For Australia, the report says, “encouraging rains” across central, northern and eastern Australia in the first two months of 2022 will support cattle production in the largest producing states.

“After a number of dry years in northern Australia, we expect these rains to stimulate restocking and herd rebuilding, adding further producer demand to an already strong cattle market,” Mr Gidley-Baird said. “Such restocking will also support increased production in the years to come.”

Australian cattle prices remain strong, supported by ongoing producer demand for restocking, coupled with the limited availability of cattle, the report says.

Cattle processing has had a slow start for the year, with Omicron cases in the community impacting the labour force.

“For the first five weeks of 2022, east coast weekly cattle slaughter in Australia was nine per cent below the same period last year and 40% below the five-year average,” Mr Gidley-Baird said.

Australian beef exports ended 2021 down 15% on 2020 volumes, the report said. The largest declines were to the US (down 31%), China (down 25%) and Japan (down 13%). Volumes lifted however to South Korea (up 3%).

Live exports followed a similar trend – down 27% overall, with volumes to Indonesia down 13% and to Vietnam down 44%. When you add restocking and herd rebuilding into the scenario, along with a drop in consumer demand, beef producers could be facing a price correction and their first drop in revenue for over five years.