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CME: Food Service Demand Decline a Concern for Meat Markets

01 September 2016

US - While there is broad consensus that expanding meat supplies will continue to pressure wholesale prices in the short term, the hope is that demand will be strong enough to absorb the higher supply without significant price erosion.

So far that does not seem to be the case. Hog values are down 25 per cent since June and futures are pricing Q4 fed called 15 per cent lower than a year ago and below spot.

We think these numbers reflect both the impact of higher supplies but also some demand erosion (higher consumption is not always higher demand).

Strong retail promotions this summer certainly helped clean up the surge in beef slaughter/ production but that likely came at the expense of other proteins.

Collapse of belly prices in July is a case in point. The export demand picture has been somewhat mixed, with beef sales strong thanks to lower prices but pork shipments disappointing, at least in July and early August. The strong US dollar remains a key negative for US exports.

Foodservice demand, which over the years has become an increasingly critical driver for the meat industry, remains a source of great worry for livestock producers. However, you spin things, recent trends are quite negative and do not bode well for protein demand.

Take the first chart. The Restaurant Performance Index has been steadily declining since its peak in 2014. The customer traffic index decline has outpaced the broader index and now shows the number of customers walking through the door is lower than a year ago.

Restaurants will try to boost revenues by changing menus, selling more drinks etc. but if you are a livestock producer who is producing more tonnage, you should be really worried when there are fewer customers today sitting at tables or looking at menu boards. And that customer traffic index, which in July was pegged at 98.7, has been under the 100 steady state mark for much of this summer and in six of the last eight months.

The situation appears to be particularly worrisome in the so called fast casual category. In the June report, 78 per cent of respondents in this category said they were seeing lower customer traffic than a year ago and just 22 per cent reported higher traffic.

But family dining, casual dining and fine dining also had more respondents indicating contraction than expansion in customer traffic.

One possible reason for the decline is the increasing discrepancy between food cost inflation at retail vs. foodservice. You can either go buy a steak at the local grocery store on sale for $5.99 or go to the local restaurant and spend big bucks between steak, drinks, appetisers (and don’t forget the 20 per cent tip).

July inflation for food that will be consumed at home was down 1.6 per cent from last year while inflation for food that will be consumed away from home was up 2.8 per cent from a year ago.

Food retailers also have become more aggressive in offering prepared foods that look and taste like something you will get at a restaurant but at a fraction of the cost.

Also concerning, from a demand perspective, is the worsening outlook for sales and general business conditions in the next six months (see second chart). About 21 per cent of operators noted that they see worsening sales six months from now, up from 18 per cent the previous month and 10 per cent back in March.

The survey also showed that 28 per cent of restaurant operators expect worse economic conditions 6 months forward compared to 18 per cent that expect economic conditions to improve.

The mood in the restaurant industry has deteriorated and the chart shows what proteins are more vulnerable to a worsening outlook at foodservice.

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