Defining Demand

Knowing the factors that can influence beef demand are important to sorting out the debate.There's an easy way to get into a fight in beef country. Just walk into any coffee shop and start talking about beef demand - what is it and what it means to a rancher, feeder or packer. You're bound to stir some emotions and provoke a wide range of theory and analysis.Now that we've all heard about "the turnaround"

Knowing the factors that can influence beef demand are important to sorting out the debate.

There's an easy way to get into a fight in beef country. Just walk into any coffee shop and start talking about beef demand - what is it and what it means to a rancher, feeder or packer. You're bound to stir some emotions and provoke a wide range of theory and analysis.

Now that we've all heard about "the turnaround" - that last year, for the first time in more than 20 years, beef demand increased more than the previous year - the debate over demand takes on a whole new tone. Few will argue that for the long-term health of the industry, beef demand must continue to improve. But, everyone might get along a little better if there were some agreement over what determines demand and what causes demand to shift over time.

"One of the problems is confusion over terminology," says Ted Schroeder, professor of agricultural economics at Kansas State University (KSU). "It's important to differentiate between two related but distinctly different terms - quantity demanded and demand."

Quantity demanded refers to the amount of beef consumers will purchase at a given price, holding everything else (like quality and convenience) constant, according to Schroeder and his KSU colleagues Tom Marsh and Jim Mintert.

"Demand should be thought of as the amount of beef consumers will purchase over a range of beef prices," explains Schroeder. "A shift in beef demand occurs when the entire beef demand curve increases or decreases."

Changes in beef price or the quantity of beef consumed do not cause the beef demand curve to shift.

"Rather, changes in other factors, such as prices of competing meats, demographics or health and safety concerns cause the beef demand curve to shift," adds Marsh.

When beef demand increases, say due to an increase in retail poultry prices that causes consumers to substitute beef for chicken, the result is higher beef prices at any level of consumption than prior to the demand shift.

What Beef Demand Is Not Because of this confusion surrounding demand, the KSU economists sometime find it easier to explain what beef demand is not. First, beef demand is not per capita consumption.

"Per capita consumption is beef production divided by population," says Mintert. "Data on per capita consumption without considering price says little about beef demand."

The economists define beef production as the net changes in cold storage, import and exports.

Beef demand also is not beef's relative share of total meat consumption. This simply reflects production of beef relative to production of competing meats and does not include information regarding prices, Mintert says.

Finally, beef demand is not the share of consumer income spent on beef. Consumer income affects beef demand, but changes in income spent on beef does not tell us whether beef demand is changing.

"Changes in income alone can cause changes in the share of consumer income spent on beef, even if beef demand remains unchanged," explains Mintert.

Since many of the beef demand factors, as well as production, change at the same time, it's difficult to assign relative demand shifts to individual factors, says Schroeder. "But, often this happens with casual observation of trends and beef demand shifts," he says.

A Look At The Economics Over the past 20 years, a more-than-casual observation shows beef demand has been relatively inelastic (i.e., quantity demanded is less responsive to price changes) and the economics of the industry indicate pork and poultry are weak substitutes for beef.

"Relative prices matter to the consumer; however, per capita consumption is not highly responsive to changes in pork and poultry prices," says Schroeder. "Also, beef expenditures represent a progressively smaller portion of total consumer expenditures, and beef demand will become even more inelastic in the future."

Still, beef demand is highly responsive to changes in consumer expenditures on all goods. Consumer willingness to spend (rather than save) a larger piece of a larger income pie has been an important source of economic growth for all segments of the U.S. economy - pulling the beef industry along.

Consumer expenditures for all goods rose from less than 90% of disposable income in the early 1980s to near 98% by 1999. And beef demand increases 0.9% for each 1% increase in total per capita expenditures.

"This means beef demand was a major beneficiary of increasing consumer expenditures during this period," says Schroeder. "But, if consumers choose to increase savings in lieu of consumption, or if disposable income declines, there could be a negative impact on beef demand."

Keeping The Curve Climbing Because beef demand is so closely tied to consumer expenditures, Schroeder, Marsh and Mintert list several suggestions based on extensive beef demand modeling for the beef industry to keep the demand curve shifting upward.

- Consideration should be given to developing an objective quality - especially tenderness - measurement. "This would make it easier for consumers to select the quality product they are seeking," says Schroeder.

- The industry cannot afford to be passive and react to food safety problems. The beef industry needs a proactive safety program to minimize how negatively food safety recalls impact beef demand.

- The industry must strive to produce healthy, nutritious beef products. For example, research and education should focus on dietary guidelines for consumers on cholesterol-restricted diets that include beef.

- The industry must broadly recognize how much consumers value their time. Declining time available for food preparation has had a negative effect on beef demand. This gives added credence to the easy-to-prepare movement, as well as the attention the beef industry must give to away-from-home consumption.

When arguing about beef demand, Schroeder asks producers to remember that the 1999 increase in beef demand was a modest one. But, it came at a time when most economic fundamentals suggested beef demand would have declined from 1998-1999. Pork prices, poultry prices, the health information index and female labor force data all predicted a downward shift in beef demand.

"Total consumer expenditures increased in 1999, and that provided a catalyst for beef demand to increase," says Schroeder.

So, in the next argument over beef demand, this illustration of price as a very critical factor in determining demand might help get your point across. Then, you can bring up the supply part of the equation.