Harrington's Sort & Cull

It's Inflated Retail Prices, Stupid

John Harrington
By  John Harrington , DTN Livestock Analyst

When the country-fried Machiavellian named James Carville was advising future president Bill Clinton to stay on message and cut to the core worry of voters in 1992, he developed a mantra for the campaign to chant its way to victory: "It's the economy, stupid."

The popularity of George Herbert Walker Bush had soared in the wake of the first Iraq war, the one with a limited objective and clear-cut results. Indeed, many political commentators thought the sitting president was virtually unbeatable. But that was before the Democratic livery stable fitted the electorate with different blinders.

In near freefall since early August (i.e., the 5-area steer average this week probably totaled close to $98, roughly $20 below the midsummer high), the fed cattle trade is in dire need of a new focus, some critical shift in perception than can once again make fundamentals relevant, drain the market swamp of panic and emotion, and restore a level of price stability absolutely necessary for rational decision-making.

Just as Carville saw the wisdom of getting down to pocketbook issues, the beef industry needs to seek help where consumer demand hits the road. Simply put, consumers must be incentivized to buy more steaks and hamburgers. Here's a challenge that doesn't require a million-dollar marketing study. The magic trick is about as old school as it gets: Retailers and food managers just need to slash prices and accept less-than-bonanza margins.

Fed steers and heifers are currently trading as much as 22% below the fall of 2015. Furthermore, the composite beef carcass value closed the week around $178.80, 14% less than last year at this time. While meat counter prices have been slowly softening since early summer, such cautious discounting has barely shadowed the country train wreck.

According to August retail data (September numbers will be released next week), the average cost of lean hamburger was $5.84, a mere 4%-5% cheaper than the late summer of 2015. Similarly, Safeway's (et al) average charge for choice sirloin steak was $8.54, only 1.8% below the jaw-dropping prices of the previous year.

Given the even longer-term nature of menu pricing, the restaurant experience now represents an even greater disconnect between consumer charge cards and feedlot/ranch back accounts.

Yes, I'm painfully aware of sermons concerning the historical lag time of retail prices. You might appreciate the logic to some extent, but surely some proportionality should come into play. When live and wholesale prices fall like a rock in a matter of minutes, it shouldn't take weeks or even months for the news to reach the wilds of Wal-Mart.

For more of John's commentary, visit http://feelofthemarket.com/…

(CZ)

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