2007Jun Steak: Demand & Costs Rise

2007Jun Steak: Demand & Costs Rise

Those of you who have recently treated yourselves to a steak dinner might have suffered indigestion after receiving the bill. As the Times reports, “the cost of producing beef and the demand for it have risen so much that prices are soaring and the supply of top quality beef has dropped.”

While this development is certainly an annoyance to any American planning a summer of backyard grilling, there are implications for the greater economy and for investor portfolios as well. Believe it or not, there is even a demographic angle to this story.

Led by the consumer spending of the Baby Boomers, we are in the midst of the greatest boom in history. The economy has been growing strongly since 2002, and productivity growth remains high. Contrary to the timidity of the Federal Reserve, inflation is still quite tame. Unemployment is near historic lows, and corporate profits as a percentage of GDP are near historic highs.

The wealth and prosperity of this boom has caused a worldwide surge in demand for luxuries like steak dinners. At the same time, it’s become increasingly expensive to produce those luxuries. The worldwide boom has created a surge in demand for energy, which has sent the price of oil to new highs. The search for energy substitutes has created an enormous demand for ethanol, which has in turn caused the price of grains to rise. Higher prices of grains mean that feeding cattle is now more expensive, and higher fuel prices raise the cost of transportation at every stage in the process. So, that tasty slab of meat in front of you cost a lot more to produce today than it did a few years ago, and there are a lot more people competing for reservations at the steakhouse to eat it. Constrained supply paired with booming demand is a recipe for sharply rising prices.

Interestingly, demand for luxuries is also coming from a different source: investors. Searching for ways to diversify their new wealth (and no doubt to impress their friends and neighbors) investors have started to show interest in wine. Fine wine has been one of the best performing “asset classes,” up more than 100% in the past two years. We use this term loosely, of course. A bottle of wine, no matter how satisfying, does not pay dividends or interest, nor does it have any industrial use. Yet demand has been strong enough to warrant the creation of an investment fund, the Vintage Wine Fund.

While we don’t necessarily recommend these luxuries as investments, they do serve to tell a story. We are enjoying the peak years of the greatest economic boom in history. Enjoy this prosperity now, and use it to continue building wealth. We want to have as large a buffer as possible for the next economic season which is just a few years away.