UB Consulting: Will Growing Credit Issues Impact the Beef Market?
Wednesday, 22 March 2023For many, the recent data regarding delinquency rates on credit cards and consumer loans has signaled warnings on the financial health and well-being of the American consumer. While nowhere near historical averages, these delinquency rates have been increasing from record lows reached in 2021. With the growing concern over how these delinquency rates will impact the economy, we have decided to look at the relationship between the consumer credit markets and the beef market.
It is important to note that several reports have linked beef prices to the economy's overall health; however, in our research, we have not encountered anything specific to delinquency rates.
In Q4 2022, the delinquency rate on credit card loans at commercial banks was 2.3 percent – increasing 7.7 percent from Q3 2022. The delinquency rate on consumer loans at commercial banks was 2.1 percent in Q4 2022 – increasing 7.8 percent from the quarter prior. From a year-over-year perspective, the delinquency rates for credit card loans and consumer loans increased by 43.3 percent and 34.2 percent, respectively, in Q4 2022. The year-over-year increase was the largest on record for credit cards and the second-largest increase for consumer loans since the creation of each respected data series.
Despite the rapid increases, it is imperative to note that the gains are primarily due to the record low rates recorded in 2021 and the market’s attempt to normalize. The shift in consumer spending habits during the pandemic and, to a lesser extent, the government stimulus accumulated by consumers created an environment for consumers to escape potential default. At the moment, rates still sit below pre-pandemic levels. However, the combination of economic uncertainty driven by persistently high inflation levels and this recent delinquency rate increase should not be dismissed.
So, for beef market participants, what exactly does this mean?
Over the last few years, prices for many proteins—especially high-end cuts and trimmings—have been historically high at both the consumer and producer levels. Through our initial exploration of the delinquency rate data, beef prices showed higher correlation levels than pork, eggs, and chicken.
According to our calculations, from 2004 to today, the UB Beef Index and delinquency rates on credit cards have had a strong inverse correlation. In other words, high levels of delinquency rates correlated to low beef price levels. * Of course, correlation does not equate to causation; it is simply a measurement of the linear relationship between the data. Nonetheless, the correlation, in this instance, is compelling.
*Based on seasonally adjusted nominal prices.
We further separated the data set into two periods: 2004 to 2019 and 2020 to YTD. Before 2020, the correlation overall resembled our initial findings, illustrating a robust inverse relationship. However, from 2020 to 2022, the correlation weakened slightly. This could be due to the overall increase in the demand for beef post the COVID pandemic, combined with the historically low delinquency figures.
Like many other proteins, beef has premium and less expensive product categories. We created a ratio using Urner Barry prices for NY strips to ground beef to measure the sensitivity in price movements between higher-end and lower-end products. We had initially hypothesized that there would be some substitution effect involved with higher delinquency rates on credit cards – the higher the delinquency rate, the lower the price differential from high-end cuts to ground beef. The belief is that consumers with higher debt levels would potentially trade down to less expensive products from higher-end cuts.
However, our findings concluded the opposite. The overall correlation between this ratio and the delinquency rate was generally strong and positive. Periods in time absent of a recession illustrated a positive correlation between delinquency rates and the ratio constructed. Essentially, the price difference between higher-end cuts and trimmings grew larger when delinquency rates increased.
During the Great Recession, the relationship altered. In the short run, the ratio contracted with higher rates of delinquency. This correlation, however, was short-lived, as it reached an inflection point where the correlation became positive again. In other words, there may be some indication here that there was a trade-down in the short run. As the recession progressed, consumers may have reverted back to spending on higher-priced items as delinquency rates increased.
From 2020 to YTD, the correlation between the ratio and delinquency rates was inverse and relatively weak. During this time, the beef market has experienced historically high price levels for ground beef and NY strips; therefore, the ratio between the two products has been historically low. Delinquency rates, for reasons mentioned previously, have also been historically low.
Our market situation is very different from that of the Great Recession. If the current economy were to slow down and enter a recession period, could this relationship normalize as it did during the Great Recession?
It is still early to tell. If the economy were to take a turn and delinquency rates would increase, beef market participants could potentially witness consumers shift spending habits from higher-end to lower-end products in the short run and adjust after reaching a certain inflection point. It is important to note that we are not projecting a downturn in the economy; however offering a hypothetical scenario.
As mentioned above, macroeconomic indicators closely link beef prices to the economy’s overall health. Credit card delinquency rates may be an additional tool for beef market participants to project future price movements in the beef market complex.
Additional analysis will have to be done to confirm these initial findings.
Photo Credit: Grossinger / Shutterstock.com
Andrei Rjedkin
Urner Barry
1-732-240-5330 ext 293
arjedkin@urnerbarry.com
Angel Rubio
Urner Barry
1-732-240-5330
arubio@urnerbarry.com