Counter Revolution

It's a long ways down a seemingly bottomless well. For beef demand, the fall lasted about 20 years and dragged over 20% of market share along with it.Even now, no one is sure if the industry found the bottom of the slide or just a little quicksand to break the momentum of the plunge. But most everyone is enjoying the view that comes with increased demand."What is particularly noteworthy, in its simplest

It's a long ways down a seemingly bottomless well. For beef demand, the fall lasted about 20 years and dragged over 20% of market share along with it.

Even now, no one is sure if the industry found the bottom of the slide or just a little quicksand to break the momentum of the plunge. But most everyone is enjoying the view that comes with increased demand.

"What is particularly noteworthy, in its simplest terms, is that domestically people paid more money for more beef last year. That hasn't happenedsince 1972, so that's a significant development," says Bill Helming, a business consultant and economist for Bill Helming Consulting Services in Olathe, KS.

Helming explains domestic consumers took home 1% more beef last year and, adjusted for inflation, paid 1.2% more money (Table 1, page 48). This reality is all the more astounding on the heels of the worst equity blood bath in beef industry history, and given the fact the rest of agriculture seems to be treading water at best (see "Running in Place").

In fact, Helming estimates the beef industry lost about $4.5 billion in equity during 1994-1998, compared to about $3.5 billion worth of equity lost during the economic cataclysm of the 1970s. But, he points out the roads leading to both wrecks were dramatically different.

"During the '90s, particularly 1994-1998, it was a combination of the year after year decline in demand catching up. Not only was the demand curve shifting down, it was shifting left. It was the worst of all economic possibilities. Clearly, the American people were paying less for less beef and at a more dramatic rate than ever before," says Helming.

Conversely, Wayne Purcell, director of the Research Institute of Livestock Pricing at Virginia Tech, explains the cyclical surge of production in the mid-'70s was exacerbated by the government-imposed price ceiling on beef. "Part of the record number of beef cows started to be liquidated as prices plunged, but these problems were buffered by a demand for beef that had been increasing through the '60s and '70s as consumers showed an appetite for marbled beef," says Purcell.

"Then, in about 1979, the world turned. Concerns about cholesterol levels became fashionable, and more families had two wage earners working outside the home and less time and interest in cooking," he adds.

This time around, Purcell explains dramatic declines in consumer demand and growing price-inflated middleman margins put pressure on beef prices. Between 1979 and 1986, with per capita beef supplies essentially constant at 78 lb., Purcell points out inflation-adjusted beef prices plummeted more than 30% as consumers turned away from fresh beef.

"We have to keep reminding ourselves that the only dollars we have to divide are the dollars that consumers will pay," says Purcell.

So, Why The Good News, Now? Both economists point out that plenty of history needs to float under the bridge before the current upturn can be considered the precursor of a long-range trend. But, Helming adds, "The challenge is to figure out whether or not this (increased demand) is a flash in the pan or has some permanency to it. In my opinion, it does have some permanency to it."

Keep in mind, no one has ever accused Helming of being an industry cheerleader. In fact, using similar USDA data and methodology in 1980, this is the same economist who stunned the industry by saying what many considered to be a cyclical decline in beef prices and demand was in fact the harbinger of a major downward shift in beef demand overall. He proved to be correct.

Armed with the same economic toolbox, Helming says three factors now set the stage for a true shift upward in beef demand.

* "Overall, the U.S. economy is good and the affluence in our economy has risen to the degree where it's finally having an impact on beef consumption." Ironically, the same low commodity prices hampering agricultural producers also contribute to the strength of the nation's economy in total.

* Next, and more important, Helming says, is the growing shift in consumer opinion that it's not only OK to eat red meat again, but that it may even be good for you. It is replacing the perception consumers harbored for better than two decades that red meat might be harmful.

"I can't emphasize too strongly how much damage, how much incorrect information and how much irresponsibility has been created by USDA's dietary guidelines which are weighted toward carbohydrate consumption," he explains.

Along the same lines, Helming says, "I believe that to some degree the American public, in a modest but significant way, is becoming saturated with poultry. And, to the degree that consumers think it might be good for them, they would just as soon eat a little more beef because of the taste."

* Finally, Helming says, "There is no question that we have a long ways to go with eating quality, but there is also no question that there is a definite movement from a portion of the industry to get more serious about the product."

Likewise, Purcell points out, "We are finally modernizing the beef offering in this country, and perhaps in the process we are doing something about tenderness." Besides aiming for improved tenderness, specifically, he explains some of the value-added convenience the industry is developing with new beef products makes traditional tenderness concerns moot.

"I think the real key is that the big firms are starting to change," says Purcell, pointing to the fact the nation's largest packers are beginning to look at value-added opportunities as much as cost reduction to boost their bottom lines. "The beef business, even with all of its problems, is still the largest food sector there is. It's such a big ship that you can't turn it unless the big players do," says Purcell.

With that in mind, Helming also says, "I believe there is a growing awareness on the part of the beef industry that there needs to be more cooperation and unity, and there needs to be a different marketing system than selling on the average."

However, Helming doesn't believe vertical cooperation or value-based pricing will necessarily offer salvation to everyone in the industry.

Will It Last? Whether the recent upturn in demand is the shape of the future or merely an odd blip on the screen will likely depend on producer response to the industry's anticipated strength in the next few years.

"The beef industry clearly has the capacity and propensity to over-produce, even with the demand picture looking better," says Helming. "One of my real concerns is that there will be this general thought process on two different fronts:

* "One, if overall profitability improves, which I anticipate for the next several years, then there is a motivator to produce more.

* "Second and just as important is the concern that people will see that demand is increasing, figure that the problem is solved and just go about their business," he says.

Indeed, Purcell worries that calf prices driven higher by anticipated cheap corn and cyclically lower cattle numbers could deter producers from following through with some of their initiatives. Things like increasing product quality and consistency, or even supporting the beef check-off which supplies advertising and product development.

As well, Purcell cautions the industry's failed pricing system - where half the cattle earn more than they're worth and half bring less than they're worth - will make building industry consensus as tough as ever.

Moreover, Purcell believes the current pricing system will continue to add volatility to a number of issues related to demand and to those that producers think are related. As an example, he explains things like mandatory price reporting and country-of-origin labeling have little to do with driving demand, but they're the type of emotionally-charged issues most likely to be latched on to when the chips are down.

Plus, Helming expects the beef industry to become even more segmented in the future.

"The structural makeup of the cow/calf business presents a huge dilemma," says Helming. "Based on USDA census data, we have roughly 800,000 cow/calf operations in the U.S. today. Of those 800,000 about half the total calves are produced and weaned by 8% - about 64,000 - producers. The other half of the calf crop comes from the other 92% - 736,000 - producers.

"The average herd size of these 736,000 producers is about 30 head. The average herd size of the 64,000 producers is about 240 head...I'm not demeaning that, but you have half of the total beef production in this nation coming from producers who are not motivated by economics," he says.

However the demand cards play out, Purcell suggests, "I would go and find someone who really understands what we need to do to satisfy the consumer and I would work with them."

He'd look for opportunities to partner with folks who build and market beef outside of traditional marketing channels. After all, if beef demand stalls, it's back to the same ol' cost cutting Peter to pay Paul commodity business.