Serving the consumer is the only way to return more profit to beef producers.
Beef demand can continue to grow if the beef industry can continually probe into what consumers want and provide it.
Talking about beef demand is popular again. There's a growing perception that the situation is more positive than it's been in decades.
It's important for producers to understand what happened during the 20 years prior to 1998 when the beef business was decimated by painful and sustained decreases in demand. In that way, we will never allow it to happen again.
Everyone from small producers to huge processors must understand what demand is and is not, and all must be involved in building demand. It's the magic potion that can bring the chance for consistent profits back to the industry.
The scatter plot (shown below) of per capita consumption and inflation-adjusted retail prices for beef tells it all.
Any move down, or to the left and down, in price constitutes a decrease in demand. Especially painful are the moves that show a lower price on a smaller per capita supply.
You're in trouble when the only way you can sell a smaller quantity is at a lower price. Since the mid-1970s the per-capita offerings fell from 95 lbs. to 65 lbs. in the 1990s, and price declined from near $2.90 in 1980 to below $1.70 in 1998.
A demand index requested by the Demand Study Group put together in 1996-97 by the National Cattlemen's Beef Association (NCBA) provides a simple measure of the decline in demand.
If we consider the year 1980 as a base, beef demand fell almost 50% from 1980-1998. But when 1997 is used as the base year, it shows demand has increased 9.7%.
On the basis of this huge turn to the upside, we are seeing the prospects for $80 fed cattle, $90 yearlings — and with corn prices low — calf prices well above $100 again. There is an improving chance for a producer to make a buck. That is welcome news.
Prices are soaring based on recent demand increases and the supply side cycle that has reduced numbers across the past several years. If the demand side continues to build, we will see record-high prices for cattle and calves in the next five years, if there are no big surprises in the corn crop.
This all sounds very good, but it raises an immediate question: Why did it take so long?
A History Lesson
Coming out of the decade of the 1970s with heightened interest in cholesterol, the typical consumer was caught up in an on-the-go lifestyle with two workers in most families and a growing impatience with lengthy meal preparation. Willing to pay a price for convenience, consumers also wanted high quality and consistency.
The beef industry was slow to accommodate, and the fresh beef offering was increasingly diverging from what the consumer wanted. Consumer dollars went elsewhere, many of them to poultry where the per-capita offering increased 40 lbs. across the same time period that beef offerings decreased 30 lbs. on a per-capita basis.
Research and focus groups found that concerns over cholesterol/fat, quality issues and consistency, and lack of convenience were the reasons for the decline in demand.
In the 1990s, two NCBA Beef Quality Audits documented the quality-related issues, and experts found 20-25% of Choice steaks in the grocery stores were too tough to chew.
This appalling failure rate was caused by an increasingly heterogeneous cattle herd. USDA's policy position of calling for grade changes — only when the industry demands them — blocked any progressive moves toward identifying important attributes like tenderness. Doing so could have a price signal attached to it and give the right incentives to producers.
The trend toward everything selling at the same average price intensified, and there was no pricing to the level of value and no effective price-based communications.
The price system failed to coordinate the activities along the supply chain and ensure reasonable standards of quality control. The fresh beef offering continued to move away from what consumers wanted.
The beef industry has an organizational structure that features a profit center at every level. As a result, there was no player in the system of the 1980s and through much of the 1990s that was willing to make the huge investments needed to modernize the product offering. Demand decreased consistently and persistently.
There was more talk and recognition of the basic problems, but no profit center saw a sufficient profit opportunity in fixing the problems. Domestic consumers continued to walk past the beef offerings and the lack of quality control kept the U.S. out of important export markets like Japan.
The Industry Evolves
The picture started to change when contracts and vertical alliances began to deliver some of the much-needed coordination between what is produced and what the consumer wants, and to bring in at least a modicum of quality control.
The price system was not effective, so non-price means of coordinating replaced the price system as a coordinating mechanism.
In this setting, smaller, value-added processors started to offer cooked beef products that could be microwaved.
In addition, more check-off dollars were moved into programs serving as catalysts to encourage inter-level cooperation in the beef industry and new product development in the private sector.
Seeing the opportunities and concerned about their margins in the face of a cyclical reduction in cattle numbers, the large processors moved aggressively away from being low-cost commodity operators to merchandising branded products. This change by the big packers was the essential move that became the sufficient condition for a turn in demand.
Paralleling these domestic market changes was a resurgence in exports as Japan's economy recovered and conditions stabilized in Mexico and South Korea. These three countries, along with Canada, buy up to 90% of U.S. beef in world trade.
The export demand has been a major contributor to the demand improvement since 1997 or 1998. The future of the beef business rests on the continued cultivation of the export market and continued vigilance of consumer preferences in the domestic market.
The Producer's Role
There's no need to slide into a deep demand hole again. Demand can continue to grow if the beef business can find a way to continually probe into what consumers want and provide it.
The only dollars the industry has to divide across all players from retail down to the producer are the consumers' dollars. And, the only way to grow those dollars and enlarge the economic pie is to do a still better job of serving that consumer.
This requires continued, persistent effort by state and national producer associations to understand the consumer. It also requires a continued willingness by the big, for-profit firms to spend money on product and market development in the domestic and international markets.
It's important that everybody keep their eyes on the ball, work to build demand, maintain an operating environment that's not overly regulated, and provide an environment in which the private sector investment dollars will continue to flow.
The result will be high prices, bigger market share, a larger cattle herd and profit opportunities for everybody.
Wayne Purcell is an Alumni Distinguished Professor in marketing, price analysis and public policy at Virginia Tech in Blacksburg. He can be reached at 540/231-7725; or e-mail: [email protected].