At a point in the cattle cycle where all the attention is riveted on the supply side of the equation, it’s important to recognize that beef demand still drives the beef market bus, says Glynn Tonsor, Kansas State University ag economist.
That’s because retail demand strength reflects consumers’ evaluation of beef. “At the end of the day, that determines how much money is available to subsequently spread out in different sectors,” he says. In short, the amount of money consumers are willing to spend on beef drives prices and profitability for everybody.
However, Tonsor says there’s a lot of confusion on what beef demand really is. To help shed a little light on the subject, he offers this analogy to show what it isn’t.
“Say you’re shopping for jeans and see a ‘buy one pair, get one free’ sale,” he says. “The question is, if you show up thinking you’re going to buy one pair of jeans and then you see a buy one, get one free, do you go home with one pair or two?”
While that may be a silly question, it makes an important point. “The amount of money you were willing to spend on jeans didn’t change. All that changed was the relative price. By buying one and getting one free, the price/pair is lower. So if nothing else changes in our story except buy one, get two, that’s an example of per-capita consumption.”
And consumption and demand isn’t the same thing. In other words, the number of jeans purchased per person went up, but demand didn’t change. “There’s nothing in that story that says you valued jeans more. Rather, you’re willing to go home with more because the price is lower.”
That, Tonsor says, is an important point. “Per-capita consumption in and of itself isn’t demand. The volume of beef tied to a price tells us something about demand.” In short, if consumers buy more beef and are willing to pay more for it, demand has gone up. If consumers buy more beef but only at a lower price, demand has gone down.
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“In 11 of the past 12 quarters, so for almost three years coming out of the recession, we’ve seen year-over-year gains in beef demand, even though in most of those quarters, we’ve had net per-capita consumption declines.” Tonsor says.
So as the beef supply continues to tighten and price goes up, consumers are eating less beef. But that’s because there’s less beef available to eat. The key is they’re willing to pay more to keep beef in their diet.
That’s why, he says, the beef industry needs to continue to focus on the demand drivers it can influence. According to research, those drivers are food safety and product quality.
“Going forward, we’re probably going to have more reductions in per-capita consumption,” he says. That will be due to a smaller cowherd next year. Should cattlemen retain heifers this fall, a tight supply scenario will get even tighter. As that happens, Tonsor says, it will be even more important to understand the difference between consumption and demand – and to focus even harder on keeping consumers coming back to beef.
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