Decreasing beef demand is blamed for the recent drop in beef prices since Sept. 11. On the other hand, from 1999 through the third quarter of 2001, increased beef demand was getting credit for causing the beef price strength. And before that, beef demand was blamed for the 20-year drop in real (deflated) beef prices from the late 1970s though 1997. What's going on here?
To begin, we need to define what demand is and is not.
The Economists' Definitions
Economists define “beef demand” as the amount of beef that consumers are willing and able to purchase over a range of prices, given that all other influences in the market are held constant. Figure 1 depicts a theoretical demand curve and illustrates how price must decline in order for the quantity purchased to increase. This is a basic, fundamental relationship between beef quantity and beef price to always keep in mind.
“Change in quantity demanded” is movement along that demand curve. Figure 2 shows a theoretical example of how, when price moves down from Pa to Pb, the quantity purchased increases from Qa to Qb.
A “change in demand” occurs when the entire beef demand curve shifts up (demand increase) or shifts down (demand decrease). Figure 3 presents a change in demand by illustrating a theoretical 1990 demand curve compared to a theoretical 1980 demand curve.
Note that when beef demand decreases, beef prices are lower for each and every beef quantity consumed than prior to the demand shift. This theoretical change is indicative of what actually happened in the '80s and '90s.
Changes in beef price or the quantity of beef consumed didn't cause the beef demand curve to shift in Figure 3. Rather, changes in other factors, such as price of competing meats, consumer personal incomes or health or food safety concerns caused the beef demand curve to shift.
Beef demand and “beef consumption” are two different measures. Remember that beef demand is a schedule of pound/deflated price relationships. Beef consumption is the per capita supply over time.
Because beef is a perishable product, we consume what we produce. If more is produced, more is consumed. If less is produced, then less is consumed. As a result, per-capita consumption is more related to available supply than demand.
Figure 4 shows the annual deflated beef price-quantity relationships for 1980-1998. Each point on the chart represents the annual retail beef price and the per capita retail beef consumption for a particular year.
Notice that all the points for the early 1980s are in the upper right hand corner. As the years progressed, however, the points moved down and to the left. This shift down and left illustrates the decrease in beef demand during the 1980s and 1990s. Consumers were eating less and paying less for it.
Why The Drop In Demand?
Numerous studies indicate that the long-term decline in beef demand was due to:
- poor and inconsistent quality,
- changing consumer demographics and preferences,
- health and nutrition concerns,
- food safety concerns and
- failure to develop innovative, convenient-to-prepare beef products.
Marketing and pricing practices were partly responsible for the demand decline because they didn't allow adequate transmission of price signals from consumers to producers. Since cattle producers didn't receive the economic incentives to produce the type of cattle that consumers desired, they didn't alter their production programs to produce a more desirable product.
In fact, ranchers turned to larger breeds to increase the weight produced. This led producers away from a quality focus to a weaning weight focus. After all, cattle were being marketed on averages, so quality didn't really seem to matter.
Today's migration to grid pricing and value-based marketing is designed to focus on quality by paying premiums for desirable cattle and discounting undesirable cattle. Quality signals are now starting to be sent. Value-based marketing and commodity beef are now going in two different marketing directions.
The Good News
The good news is that beef demand may have changed upward. Figure 5 illustrates the decrease beef demand that Kansas State University researchers documented during the 1990s.
With 1990 as the base of 100, this index shows that by 1997 retail beef price was down to 83% of what it would have been if demand had stayed at the 1990 level. This is a 13% drop in demand over the 1990-1997 period. Beef cutout demand and slaughter steer demand both went down 30% over that period. The three demand values fell even more in 1998.
The turnaround is illustrated in the 1999 and preliminary 2000 data. In both years, we see increases in all three values. By June 2000, the retail beef index is 91, beef cutout is 83, and the live steer price index is 76.
Two years don't make a trend, but this apparent demand increase is the best news for our industry in many years. Increasing beef demand changed the dynamics of beef cattle marketing in 1999 and 2000.
The Effects of 9/11
Two factors are currently affecting U.S. beef demand.
Faltering economies in Japan and South Korea have cut U.S. beef exports. As a result, this beef has entered the U.S. domestic supply.
Sept. 11 and its economic fallout have prompted Americans to stay home more. The resulting loss of restaurant business has reduced white tablecloth beef demand.
These factors have shrunk beef demand and are pressuring cattle prices. Cattlemen's response to these lower prices has been to hold slaughter cattle back to sell them at heavier weights — putting even more pressure on slaughter cattle prices. A decrease in beef supply the first half of 2002, however, should offset some or all of this demand decrease by the end of second quarter 2002.
Next month, I'll discuss the implications for ranchers of the changing beef demand situation.
Harlan Hughes is a North Dakota State University Professor Emeritus. Now retired, he lives in Laramie, WY. Contact him at 701/238-9607 or [email protected].
February 6-9 — Cattle Industry Convention and Trade Show, Denver, CO; 303/694-0305.
February 10-17 — Iowa Beef Expo, Des Moines; 515/855-4322.
February 11-14 — Western Veterinary Conference, Las Vegas, NV; 702/739-6420.
February 13-19 — Society for Range Management Convention, Kansas City, MO; 303/986-3309.
February 20-22 — International Livestock Congress Beef Forum, Houston, TX; 817/367-6563.
February 20 — 5th Annual Western Science Research Update Conference, Monterey, CA; 510/763-1533.
February 20-23 — National Meat Association 56th Annual Convention, Monterey, CA; 510/763-1533.
February 21-22 — American Meat Institute's Annual Animal Handling and Stunning Conference, Kansas City, MO; 703/841-2400.
February 22 — Wind Energy and Rural Development Workshop, Grand Forks, ND; 701/777-5000.
March 15-17 — Ohio Beef Expo, Columbus; 614/873-6736.
April 27 — Super Cow 29, Carroll County Fairgrounds; Berryville, AR.
May 20-22 — American Feed Industry Ass'n 2002 Annual Convention, Reno, NV; 703/524-0810.