Source: Tom Johnston, MEATINGPLACE.COM, 4/16/10

Two months before their typical seasonal upswing, wholesale ground beef prices are approaching record levels on steady demand and tight supplies. If sustained throughout the summer, the trend could pose challenges for burger chains that are vying for cash-conscious consumers with discount promotions.

USDA data for the week ended April 10 showed wholesale prices for 90 percent lean and 50 percent boneless beef, the typical blend used to create 80 percent lean hamburger patties sold by burger chains, were roughly $1.63 per pound and 86 cents per pound, respective increases of more than 30 percent over price lows in November last year and nearing record highs of 2008.

John Nalivka, president of agriculture marketing firm Sterling Marketing, told Meatingplace prices have moved higher thus far this week and, based on strong demand and tight supplies, should remain at near-record levels throughout the summer.

"For anybody who's on the buy side, this is going to have an impact," said Nalivka.

The most vulnerable buyers, however, are burger-centric quick-service restaurants. While retailers have some flexibility in the meat case by way of product mix, QSRs generally must buy a fixed amount of ground beef at a certain price to serve customers who want hamburgers. Meanwhile, QSRs will be pressured to raise prices, a tough proposition given that they've conditioned consumers to expect cut-rate deals in a down economy.

"The problem on the foodservice side is, and we saw this 10 years ago, is when they get into discount wars and sell burgers for, say, $1, it's hard to get the consumer off that price," Nalivka said. "If you raise the price, their reaction is, 'Wait a minute, I came in here to buy a $1 burger like I did last week."

Neil Stern, a principal at Chicago-based retail consultancy McMillan Doolittle, told Meatingplace, "In some cases, inflation helps retailers, at least from a sales standpoint. If prices go up too much, it could curtail demand--not good during bbq season. There are lots of places to trade to in the meat case, including other proteins. I think retailers will be very flexible and see what happens with demand."

Margins for packers, meanwhile, are steady, but not "gangbusters," Nalivka said, due to higher live cattle prices. However, surging drop credit prices have been a boost.

Supply

Discounts on ground beef at retail and in foodservice have helped boost demand at a time when supplies are especially tight. A typical squeeze in domestic supply that occurs in February and March would normally be offset by imports, particularly bull meat from New Zealand, Australia and Uruguay. However, rains in Australia after three years of drought impelled farmers to hold onto their cattle, for example. Meantime, slaughter levels have not been high enough to offset the trend and the seasonal demand surge is on its way.

"I'm not saying it's going to be a replay of 2008, but certainly well above a year ago," Nalivka said of ground beef prices. "The bottom line is hamburger prices are going to stay higher."

Ninety percent lean prices for domestic ground beef were $1.57 per pound in March, compared with $1.36 per pound in March last year and $1.44 in March of 2008. They peaked at $1.81 per pound in July of 2008.

Fifty percent lean prices for domestic ground beef averaged 89 cents per pound in March compared with 81 cents per pound in March last year and 61 cents in March of 2008, which is about the five year average. Those prices rose to 99 cents in August 2008. The price by Thursday of this week had climbed to about 90 cents per pound.

The blended cost of 90 percent and 50 percent lean boneless beef, assuming an 80 percent lean product, was about $1.40 per pound in March, compared with $1.22 in March last year and $1.24 in March 2008. The record was $1.59 in July 2008. The five-year average is $1.13.

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