Monthly Market Profile: Fast Food Restaurants Take Advantage of Low-Carb Dieting Trend
by Nevil C. Speer, PhD, Western Kentucky University 9/11/2004
Seasonal woes upon the market are in full force. Fed trade's $86-7 mark several weeks ago provided some anticipation of an impending fall resurgence. That glimmer of hope faded quickly. The reality is the market remains bogged down and is struggling to find traction for any type of sustainable breakout to the upside. Perhaps most concerning, though, is the apparent shift in psychology during the past several weeks following the market's relapse to the lower $80's. Momentum now appears to be with the bears. Fed cattle trade established new seasonal lows plunging to $80-1 prior to Labor Day. Cattle feeders did manage, though, to get more money for post-Labor Day showlist offerings.
Much of the market's difficulty has been catalyzed by BSE-induced trade restrictions. Since December 23 the beef complex has been burdened with relative surplus of product. At the outset the industry absorbed additional throughput relatively easily. That occurred, though, during a period of peak demand from a seasonal perspective coupled with strong underlying interest stemming from favorable consumer confidence, attractive featuring, growing popularity of low-carb dieting and new restaurant promotions (more on all of this later). However, spring's demand level has proven difficult to sustain in recent months. That's occurred for several reasons: one, retailers are operating in a period in which beef purchases are typically slow from a seasonal perspective; two, it appears that consumers are becoming cautious in their perceptions regarding the overall economy and that is likely spilling over into the beef complex.
As mentioned earlier, bearish psychology seemingly dominates the market right now; that sentiment received confirmation by the release of USDA's August cattle-on-feed report (see table below). Total feedyard inventories were 3% ahead of last year's mark and nearly even with the five-year average. More significant, though, was interpretation of July marketings: 15% below 2003's pace and 10% behind the five-year benchmark. 2004 marked the first time that July marketings fell behind the average pace of the previous three months. And while monthly placements were also well behind both last year's mark and the five-year comparison, it appears that September's report, per typical fall run activity, will likely reflect that feedyards have been busier unloading trucks than loading them during the month of August. The underlying theme is that front-end supplies appear to be building. Most indicative of that fact is the accelerated rate at which carcass weights have seasonally increased in 2004.
In the absence of foreign trade, and in response to waning domestic sales, packers have been forced to initiate a dramatic slowdown in harvest rates throughout much of the summer. Meanwhile, foreign trade restrictions have incrementally impacted inventory throughout the year. That incremental effect of export cessation coupled with declining throughput is catching up with the industry; the beef complex is now mandated to reckon with a widening disparity between available supply and domestic production requirements. The net result: cattle feeders are beginning to lose leverage when it comes to their bargaining position. Marketings need to be hastened in order to prevent carryover from becoming burdensome in coming months.
Currentness within the feeding sector is at a critical juncture as we head into the fall; the balance of which can easily tip either way. Several ominous factors, though, are working against its favor. First, corn is cheap while replacement cattle are expensive. Second, we are embarking upon a period in which closeouts are likely to turn negative. Third, it appears resumption of trade normalcy with Japan may be delayed until the first part of 2005 at the earliest. Fourth, packer margins remain negative; until that reverses there'll be no incentive for them to get ahead of showlists. And lastly, consumer confidence appears to be waning which doesn't bode well for domestic beef expenditures over the short term. Beef movement needs to be ramped up before we see a dramatic shift in prices; in fact, the light-Choice cutout fell below the $130 mark on September 3 (the first time since mid-February) and again on September 10. If the balance does indeed tip the wrong way cattle feeders can get behind very quickly and digging out will be cumbersome. And it's those concerns which been at work over at the CME. Three months ago (June 7) the October and December live cattle futures contracts established new highs at $89.55 and $89.40, respectively. Since that time the contracts established lifetime highs in late-July but have since regressed: the contracts closed on September 10 at $85.03 and $81.10, respectively.
Disappointing demand of late has disturbed some market watchers; they're troubled by conflicting signals between consumer behavior and overall economic trends. Nonetheless, predicting consumer behavior is difficult. Logic doesn't always play out – consumers can prove to be fickle and unpredictable.
Moreover, some reversal shouldn't be surprising. As an example, last month I cited some new evidence from Gallup that current low-carb diet popularity may begin to wane at some point in the near future. Meanwhile, from a broader perspective the beef industry is far ahead of its position several years ago. And during 2004 beef expenditures have received a boost as spending continues to surge ahead of last year's pace.
Fast food restaurants have been especially busy taking advantage of simultaneous low-carb dieting trends and beef's popularity. The result has been a cascade of various burger promotional efforts. The race to bigger burgers was largely kicked off by CKE Restaurants, operators of both the Hardee's and Carl's Jr. restaurant chains. In 2003, Carl's Jr. introduced a half-pound burger albeit not in the spirit of being a diet food. McDonald's subsequently followed by introducing their new sandwich – the Big N' Tasty offering. This past January, though, promotional fervor began in earnest.
Hardee's introduced their new line of Thickburgers (choice of 1/3-, 1/2- and 2/3-pound burgers) with an emphasis upon taste and quality; subsequent offerings by Hardee's saw those burgers offered in a low-carb package wrapped in lettuce versus the traditional bun. CKE has now introduced the Low Carb Six Dollar Burger – a one-pound sandwich offered through Hardee's sister chain, Carl's Jr.
Wendy's has initiated is own burger promotion. In April, the company began test marketing a new promotion, "Meals for Carb Counters". The promotional endeavor features a cheeseburger meal with only six grams of carbohydrates and the ability to add a second ¼-pound beef patty for an additional 89 cents. And most recently, Wendy's restaurants have been begun promotions for its new Bacon Mushroom Melt sandwich.
To be certain, McDonald's has not missed out on exploiting on low-carb popularity; their mix in the fray includes Big Mac Meal Tracks, a non-food promotion designed to increase hamburger sales.
Burger King possesses the newest campaign in the burger promotion frenzy. Their burger promotion campaign is entitled the "Angus Diet" – an intentional play by the company on the Atkin's trend. Interestingly enough, Burger King's tag line is: "The Angus Diet is not a real diet. It's really more of a lifestyle, a 'style of life' if you will." The company cites that beef is their foundational emphasis – after all the company includes "burger" in their name.
And not to be overlooked are the sandwich chains. During the summer, Arby's introduced new low-carb products within their line of Market Fresh sandwiches. While these four new items are not beef related the company simultaneously allowed customers new flexibility; similar to Subway promotional efforts, other Market Fresh sandwiches can now also be purchased in a wrap versus the traditional sandwich bread option.
"Beef is What They're All About". That tagline was associated with a recent article in the Wall Street Journal (8/19). The article explained that "…the nation's big fast-food chains have given red meat a more prominent spot on the promotional grill." That's especially important per the current economic environment in which the beef industry is operating. Dr. Rod Bowling, Senior Vice President of Food Safety, Quality, and Innovation for the Smithfield Beef Group, recently explained at NCBA's Summer Conference that export bans are costing the U.S. beef industry approximately $139/head - slightly over $10/cwt. Per his estimates nearly $100 per head comes directly from the loss of export premiums derived from both red- and variety-meat products. Meanwhile, BSE has also had a secondary effect on the industry due to changes in SRM restrictions; Dr. Bowling outlines that impact to be equivalent just slightly over $39/head - that loss is permanent and will never be regained.
That loss of export premiums, normally available to the market, limits income potentially accessible for the beef industry. And therein lays the need for the beef industry to be constantly promoting and competitively positioning itself. Any effort which encourages beef consumption and aids in stimulating beef purchases is essential to the industry's profitability – now more than ever.
by Nevil C. Speer, PhD, Western Kentucky University 9/11/2004
Seasonal woes upon the market are in full force. Fed trade's $86-7 mark several weeks ago provided some anticipation of an impending fall resurgence. That glimmer of hope faded quickly. The reality is the market remains bogged down and is struggling to find traction for any type of sustainable breakout to the upside. Perhaps most concerning, though, is the apparent shift in psychology during the past several weeks following the market's relapse to the lower $80's. Momentum now appears to be with the bears. Fed cattle trade established new seasonal lows plunging to $80-1 prior to Labor Day. Cattle feeders did manage, though, to get more money for post-Labor Day showlist offerings.
Much of the market's difficulty has been catalyzed by BSE-induced trade restrictions. Since December 23 the beef complex has been burdened with relative surplus of product. At the outset the industry absorbed additional throughput relatively easily. That occurred, though, during a period of peak demand from a seasonal perspective coupled with strong underlying interest stemming from favorable consumer confidence, attractive featuring, growing popularity of low-carb dieting and new restaurant promotions (more on all of this later). However, spring's demand level has proven difficult to sustain in recent months. That's occurred for several reasons: one, retailers are operating in a period in which beef purchases are typically slow from a seasonal perspective; two, it appears that consumers are becoming cautious in their perceptions regarding the overall economy and that is likely spilling over into the beef complex.
As mentioned earlier, bearish psychology seemingly dominates the market right now; that sentiment received confirmation by the release of USDA's August cattle-on-feed report (see table below). Total feedyard inventories were 3% ahead of last year's mark and nearly even with the five-year average. More significant, though, was interpretation of July marketings: 15% below 2003's pace and 10% behind the five-year benchmark. 2004 marked the first time that July marketings fell behind the average pace of the previous three months. And while monthly placements were also well behind both last year's mark and the five-year comparison, it appears that September's report, per typical fall run activity, will likely reflect that feedyards have been busier unloading trucks than loading them during the month of August. The underlying theme is that front-end supplies appear to be building. Most indicative of that fact is the accelerated rate at which carcass weights have seasonally increased in 2004.
In the absence of foreign trade, and in response to waning domestic sales, packers have been forced to initiate a dramatic slowdown in harvest rates throughout much of the summer. Meanwhile, foreign trade restrictions have incrementally impacted inventory throughout the year. That incremental effect of export cessation coupled with declining throughput is catching up with the industry; the beef complex is now mandated to reckon with a widening disparity between available supply and domestic production requirements. The net result: cattle feeders are beginning to lose leverage when it comes to their bargaining position. Marketings need to be hastened in order to prevent carryover from becoming burdensome in coming months.
Currentness within the feeding sector is at a critical juncture as we head into the fall; the balance of which can easily tip either way. Several ominous factors, though, are working against its favor. First, corn is cheap while replacement cattle are expensive. Second, we are embarking upon a period in which closeouts are likely to turn negative. Third, it appears resumption of trade normalcy with Japan may be delayed until the first part of 2005 at the earliest. Fourth, packer margins remain negative; until that reverses there'll be no incentive for them to get ahead of showlists. And lastly, consumer confidence appears to be waning which doesn't bode well for domestic beef expenditures over the short term. Beef movement needs to be ramped up before we see a dramatic shift in prices; in fact, the light-Choice cutout fell below the $130 mark on September 3 (the first time since mid-February) and again on September 10. If the balance does indeed tip the wrong way cattle feeders can get behind very quickly and digging out will be cumbersome. And it's those concerns which been at work over at the CME. Three months ago (June 7) the October and December live cattle futures contracts established new highs at $89.55 and $89.40, respectively. Since that time the contracts established lifetime highs in late-July but have since regressed: the contracts closed on September 10 at $85.03 and $81.10, respectively.
Disappointing demand of late has disturbed some market watchers; they're troubled by conflicting signals between consumer behavior and overall economic trends. Nonetheless, predicting consumer behavior is difficult. Logic doesn't always play out – consumers can prove to be fickle and unpredictable.
Moreover, some reversal shouldn't be surprising. As an example, last month I cited some new evidence from Gallup that current low-carb diet popularity may begin to wane at some point in the near future. Meanwhile, from a broader perspective the beef industry is far ahead of its position several years ago. And during 2004 beef expenditures have received a boost as spending continues to surge ahead of last year's pace.
Fast food restaurants have been especially busy taking advantage of simultaneous low-carb dieting trends and beef's popularity. The result has been a cascade of various burger promotional efforts. The race to bigger burgers was largely kicked off by CKE Restaurants, operators of both the Hardee's and Carl's Jr. restaurant chains. In 2003, Carl's Jr. introduced a half-pound burger albeit not in the spirit of being a diet food. McDonald's subsequently followed by introducing their new sandwich – the Big N' Tasty offering. This past January, though, promotional fervor began in earnest.
Hardee's introduced their new line of Thickburgers (choice of 1/3-, 1/2- and 2/3-pound burgers) with an emphasis upon taste and quality; subsequent offerings by Hardee's saw those burgers offered in a low-carb package wrapped in lettuce versus the traditional bun. CKE has now introduced the Low Carb Six Dollar Burger – a one-pound sandwich offered through Hardee's sister chain, Carl's Jr.
Wendy's has initiated is own burger promotion. In April, the company began test marketing a new promotion, "Meals for Carb Counters". The promotional endeavor features a cheeseburger meal with only six grams of carbohydrates and the ability to add a second ¼-pound beef patty for an additional 89 cents. And most recently, Wendy's restaurants have been begun promotions for its new Bacon Mushroom Melt sandwich.
To be certain, McDonald's has not missed out on exploiting on low-carb popularity; their mix in the fray includes Big Mac Meal Tracks, a non-food promotion designed to increase hamburger sales.
Burger King possesses the newest campaign in the burger promotion frenzy. Their burger promotion campaign is entitled the "Angus Diet" – an intentional play by the company on the Atkin's trend. Interestingly enough, Burger King's tag line is: "The Angus Diet is not a real diet. It's really more of a lifestyle, a 'style of life' if you will." The company cites that beef is their foundational emphasis – after all the company includes "burger" in their name.
And not to be overlooked are the sandwich chains. During the summer, Arby's introduced new low-carb products within their line of Market Fresh sandwiches. While these four new items are not beef related the company simultaneously allowed customers new flexibility; similar to Subway promotional efforts, other Market Fresh sandwiches can now also be purchased in a wrap versus the traditional sandwich bread option.
"Beef is What They're All About". That tagline was associated with a recent article in the Wall Street Journal (8/19). The article explained that "…the nation's big fast-food chains have given red meat a more prominent spot on the promotional grill." That's especially important per the current economic environment in which the beef industry is operating. Dr. Rod Bowling, Senior Vice President of Food Safety, Quality, and Innovation for the Smithfield Beef Group, recently explained at NCBA's Summer Conference that export bans are costing the U.S. beef industry approximately $139/head - slightly over $10/cwt. Per his estimates nearly $100 per head comes directly from the loss of export premiums derived from both red- and variety-meat products. Meanwhile, BSE has also had a secondary effect on the industry due to changes in SRM restrictions; Dr. Bowling outlines that impact to be equivalent just slightly over $39/head - that loss is permanent and will never be regained.
That loss of export premiums, normally available to the market, limits income potentially accessible for the beef industry. And therein lays the need for the beef industry to be constantly promoting and competitively positioning itself. Any effort which encourages beef consumption and aids in stimulating beef purchases is essential to the industry's profitability – now more than ever.
