Publication Note
We’re taking an extended break over the holiday weekend. Monday Morning Demand Notes will return with the January 5 edition. Merry Christmas!
The Scoreboard
Comment
Last week, we learned that… some prices are moving lower and some prices are moving higher, making it difficult to tell a good story about inflation. Headline inflation in November came in lower than expected, rising 2.7% from November 2024. That was below expectations (+3.1%) and counts as the smallest year-over-year growth since May. That goes in the “could have been worse” category, but let’s not forget that inflation is still above the Fed’s long-term target of +2.0% and the five-year pre-COVID average (+1.8% from 2016 through 2020). In addition, while we love the power of compounding with investments, it’s not as much fun when it comes to inflation. Using headline inflation figures, something that cost $1.00 in January of 2016 cost $1.10 in December 2020. Something that cost $1.00 in January 2021 is now at $1.24. I think that explains a lot of consumer angst. Economists and talking heads aren’t wrong when they say that inflation is more under control, but that’s a small consolation to consumers who continue to see above-average price acceleration.
Here’s the other issue: For every tangible “good news” story about inflation, there’s at least one in-your-face “bad news” story. According to BLS data, a dozen eggs cost $2.86 in November, down 46% from the headline-grabbing peak of $6.23 in March and down 22% year over year. But ground coffee prices reached $9.26 per pound in November, up 33% year over year. Ground beef? We’re at $6.54 per pound, up 16% year over year to yet another all-time high. Look at other “unavoidable” items: housing came in at +3.5% in November, electricity +6.9%, and automobile insurance +3.1%. It all adds up. Things are moving in the right direction. Things aren’t as bad as they were in 2022. But the average consumer doesn’t think we’ve arrived at good.
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“Perhaps, but not yet!” That’s the answer to the question, “With prices at record highs, will American consumers stop buying beef?” Circana data compiled by Anne-Marie Roerink of 210 Analytics showed November fresh beef volume sales at retail up 4.1% year over year, the best performance since May. Americans love beef. We know how to cook it. Protein is hot. And so, the demand party rolls on. (Keep in mind, though, that the ongoing pivot away from restaurants toward retail likely helps, pricing notwithstanding.) Pork sales increased 0.7%, with chicken up 4.5%. Bacon volume declined 0.5%.
This might be too facile, but at a high level, strong beef sales are bullish of cattle, which seems bullish for dairy farmer income, which is bullish for milk production, and bearish dairy commodity prices.
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SpongeBob and the Grinch can only take you so far. After driving sizeable traffic gains for the week ending December 14, activity came back to earth for the week ending December 21, per data from Placer.ai. McDonald’s visits went from +15% year over year to +5%, while Burger King traffic went from +19% to +6%. This took overall QSR traffic from +4% to +1%. Restaurant visits remained squishy for the third week in a row (-3%), so combined QSR and restaurant visits ended up basically unchanged. Grocery store visits are still strong, with traffic up 5%, making it 10 weeks in a row with traffic gaining 4% or more. Post-holiday season restaurant performance after we get past the holidays will be important to cheese demand. The perkiness seen in November may extend into the New Year. But I’m skeptical because the underlying fundamentals aren’t any better (pricing, consumer sentiment, etc.).
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I’m not sure there’s much to make of the latest employment report. Payrolls contracted in October (-105,000), then expanded in November (+64,000). The unemployment figure probably deserves mention, with the rate ticking up to 4.6% in November (BLS didn’t publish an October number). That was the highest level since September 2021. That’s not great, and a move to 5.0% at some point would only weigh on already anxious consumer sentiment. But I’m not sure the tick higher counts as a major surprise. If I had to pick a data point to highlight, it would be that wages continue to grow at a rate exceeding inflation. Private-sector earnings averaged $33.86 per hour, up 3.5% from the year prior. But here’s a cautionary note: that was the smallest year-over-year pay increase since May 2021.
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Beverage milk sales slipped in October. According to USDA data, conventional and organic sales added up to 3.73 billion pounds during the month, down 0.1% year-over-year. Year-to-date: 34.91 billion pounds, down 0.7%. The lost volume through October (240 million pounds) would be enough milk to make 13 truckloads of cheese per week over 10 months.
Though the data isn’t exactly fresh, the latest per capita consumption statistics are worth discussing. USDA published the 2024 data last week. It showed total consumption at 65.1 pounds per person on a milkfat basis, down 0.9% from 2023. Consumption added up to 523 pounds on a skim solids basis, unchanged year over year. Total cheese consumption landed at 41.9 pounds, unchanged from 2023 and only slightly higher than 2022 (41.8). American-type cheese took a hit, with consumption down 2.4% to 16.0 pounds. Cottage cheese helped pull in the opposite direction: 2.4 pounds, up 14.3% to the highest level since 2007. “Other cheese” consumption: 23.5 pounds, up 0.4%. Yogurt gained 5.8% while butter increased 4.6%.
It’s perhaps time – maybe past time – to worry about cheese consumption. Set cottage cheese aside. It’s a nice story, but it’s only 6% of the equation. American-type consumption is running at +1.0% CAGR over the past five years, down from the 10-year (+1.8%) and 20-year (1.1%) pace. We’re seeing a similar slowdown in “other cheese” consumption: +0.9% CAGR over the past five years, down from +1.6% for the last 10 years and +1.4% for 20 years. Are we at maximum pizza? Are GLP-1 medications cutting into demand in a material way? We don’t think the numbers will turn out much better in 2025, with our rolling 12-month per capita calculation running flat to negative through the summer. Given all the investment in cheese capacity over the past few years, the industry is wittingly or unwittingly doubling down on export growth to clear volume.
Butter sales slowed during the week ending December 14. According to data from Circana, butter & butter blend volume sales declined by nearly 3% year over year. Prices declined on the week, with the average at $4.53 per pound, down 16 cents on the week and down 6% from a year ago. Natural cheese sales increased for the ninth time in the last 10 weeks, with volume up by about 1% year-over-year. Prices continue to trend lower, with the average at $5.04 per pound, down nine cents on the week and down 5% year over year to the lowest level since July 2024.
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