Editor's Desk by Bob Strong

What Demand Really Is

This is the fourth part of an analysis of the beef industry: past, present and future by Wayne D. Purcell. The information is taken from his presentation entitled, "A Primer on Beef Demand" or "To Fix It You Have to Understand It."

Purcell is a Professor and Director of the Research Institute on Livestock pricing in the Department of Agriculture and Applied Economics at Virginia Tech.

Rule 2:

Something is wrong when consumer incomes are rising and beef prices are recording record low prices on a smaller per-capita offering.

Changing prices of substitutes has, we could argue, much more potential to shift the demand for beef in the short run. In 1998, to illustrate, we are in the middle of an expansion in pork that has driven hog prices down toward $30. Pork prices to consumers have declined, especially late in 1997 and into early 1998, and they will go down even more. When retail pork prices are significantly lower, beef demand declines and the entire curve shifts. Figure 5 shows the decrease, the shift, in beef demand when pork prices fall.

A quantity of beef such as B would be taken only at lower prices, and this is consistent with the weak demand for beef during 1998. But during 1995 and 1996, the exact opposite was occurring. Retail pork prices were as low as $1.89 in June of 1995 and surged to as high as $2.34 in September of 1996. This should have increased beef demand, but as we will see later, beef demand showed no increase in 1996. It appears that pork prices are making weak beef demand worse, but the crossover effect from pork is not always strong enough to pull beef demand up--even when pork prices are surging.

But what about chicken? It is chicken, not pork, that most cattlemen point to when they talk about low-prices substitutes grabbing a bigger market share and taking the market away from beef. Coming into 1998, poultry production was up and chicken prices were slightly below year-earlier levels. But has it been cheap chicken that has pulled beef demand down across the years?

Figure 6 says the answer to that question is "no." During the 1980's and 1990's, chicken prices have ben going up relative to beef. Note the general uptrend of the ratio that is formed by dividing the retail price for composite chicken cuts by the retail price for Choice beef. Consumers react to changes in relative prices, and there is clearly something at work in the beef sector other than changing prices of substitutes. We need another rule.

Rule 3:

What is happening in substitutes like pork and chicken can change beef demand, but is not cheap pork and chicken that is to blame for the prolonged problems in beef--there has to be something else.

The big problem is coming from the taste and preference "demand shifter." The impact of changing tastes and preferences is largely intuitive and obvious. If your preference for a product or service is increasing, you will buy more of it if you income allows and if god substitutes are not being priced lower. This is a long-term demand shifter, as suggested, it appears to have been the dominant one acting on since about 1980. Consumers, voting with their food dollars, have told us they have not liked the fresh beef offering. Concerns about cholesterol and fat, inconsistent quality, and lack of convenience in preparation have turned consumers' "preference" away from beef. If you ask meat buyers in surveys what they would pay for a chuck roast if they had to take it home and use it, some will say "zero." This is especially likely for high-income families where all the adults are working outside the home and where everyone is in a rush and caught up in on-the-go lifestyles. But the chuck roast and the chuck steak are still about the only way the chuck is offered--unless it is ground and sold at bargain prices in the food store or in the burger businesses. We are not converting the chuck (or the round) to product forms the modern consumer wants, so another rule is in order.