February 20, 2019
By Azzeddine Azzam
Without taking sides on whose prices and production numbers are correct, I would like to address the economic merits of R-CALF’s and the Cattlemen’s Beef Board’s (CBB) respective arguments on beef demand, cattle prices and market structure.
R-CALF claims that, since beef demand increased by 15% and fed cattle price fell nearly 5%, there is “something terribly wrong with the structure of the cattle industry’s markets.” Abstracting from the fact that price transmission from fed cattle to retail is not instantaneous, one can safely do that here because the period considered is six years (2012-2018).
Assuming slaughter and marketing costs per pound of beef stayed the same during the six years, R-CALF would be correct if the improvement (shift) in demand from 2012 to 2018 has been accompanied by an improvement (shift) in fed cattle supply during the same time period—a shift large enough to result in increased production and lower fed cattle prices, but not too large to overwhelm increased beef consumption due to a shift in demand. The argument holds irrespective of market structure. In other words, R-CALF’s argument can have economic merit without the market structure angle.
As a side note, when demand shifts upwards (or downwards), it means that consumers are willing to pay a higher (or lower) price for the same amount of consumption. Analogously, when supply shifts upwards (downwards), it means that cattle feeders are willing to accept a higher (lower) price for the same amount of production.
That is different from an increase in consumption or production not caused by a shift. In this latter case, consumers would only consume more beef if the price of beef goes down, and cattle feeders would only supply more beef if the price of cattle goes up.
CBB claims that, since both production and the price of fed cattle went up during the six years, then demand must have improved (shifted). That is correct, because if demand has not shifted, retail prices and cattle prices would have been lower because of higher consumption and production, not an improvement in demand.
But, as I mentioned earlier, increased production is not the same thing as increased supply. The supply of cattle could have also shifted downward, depressing cattle prices in the process.
In other words, the price of fed cattle would have been higher than the $117 average if the supply shift has not occurred. Shifts in supply occur when the price of inputs used to produce fed cattle (e.g., feeder cattle, corn, soymeal, etc.…) change.
The effect of plant closings on cattle prices depends on which plants packers choose to close. If they chose to close the inefficient (higher cost) plants, as one would expect a (rational) packer to do, then that would also translate into higher demand for fed cattle because improved cost efficiencies from closing the higher cost plants lead to improved demand for fed cattle.
I should point out to both CBB and R-CALF that when cattle prices go up due to an improvement in demand, it is incorrect to conclude that the structure of the cattle industry’s markets is competitive or non-competitive. Cattle prices and beef prices would still increase whether markets are competitive or non-competitive when one observes higher production and higher prices, or lower production and lower prices for that matter.
The difference is that, relative to the prices that would have prevailed if markets were competitive, consumers pay a higher price for beef, cattle feeders receive a lower price for their cattle, and the middlemen between cattle feeders and consumers keep the difference. Whether cattle and beef markets are competitive or non-competitive, that is the beefy question.
In sum, while improvements in demand may have lifted the cattle industry between 2012 and 2018, one should also consider the role of other behind-the-scene factors that determine cattle and beef prices, such as processing costs, shifts in cattle supply (not simply increases in production) because of changes in the cost of producing cattle, and market structure.
Azzam is the Roy Frederick Professor of Agricultural Economics at the University of Nebraska-Lincoln
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