Feed Lot Magazine Online, Editor's Desk

Volume VII Number 3

May/June 1999

Editor's Desk

This is the continuation of an analysis of the beef industry: past, present and future by Dr. Wayne D. Purcell, Professor and Director of the Research Institute on Livestock Pricing in the Department of Agriculture and Applied Economics at Virginia Tech. The information is taken from his presentation entitled, "A Primer on Beef Demand" or "To Fix It You Have To Understand It."

Rule 6: You can't build market share via low cost production and lower prices to consumers if there are limits to how much you can reduce costs, and/or there are expanding middleman margins that just wipe out the benefits of your cost-reducing efforts.

Turning to the Beef Data and Beef Demand

It's time to get at the facts, but before proceeding, let's recap what we have learned in past issues:

There is a big and important difference between quantity demanded and demand. You can increase what any buyer will take, their "quantity demanded," if you reduce price. In particular, we learned (I trust) not to talk about "demand being strong" when in order to move quantity, you have to dramatically lower price.
Per-capita consumption measures per-capita supply, not demand. If you produce more on a per-capita basis, you can be sure per-capita consumption will go up--but this does not say anything about demand. Price will go to whatever level is needed to clear increased per-capita supplies through the pipelines. And unless demand is increasing, that increased per-capita offering means lower prices.
It is shifts in demand, not just changes in quantity, that will be a key to profitability. If demand is increasing and the entire demand curve is shifting up, and consumers are willing to pay a higher price for the same quantity or for a larger quantity, you are into a growth phase. There are enough consumer dollars attracted to stimulate new investments and growth. Changes in incomes, relative prices, and changes in preferences can all do this--but the facts suggest demand for beef is decreasing, not increasing. When the curve shifts down, there is intolerable pressure on the producer--and some have to go out of business if demand continues to decrease and costs cannot be reduced enough to keep the business going.
Decreases in spending on beef versus other foods is a symptom of problems, suggesting beef demand is declining. This means there is top-down pressure on prices starting with consumers' refusal to pay better prices for a product offering that has fallen out of favor. When consumer-level prices fall, the price pressure and lower prices go all the way down to the producer.
Pressure back down toward the producer is even worse when middlemen's margins are expanding. This appears to be especially true at the retail level where price spreads for beef are expanding, suggesting increased costs, bigger profit margins, or some combination of the two.
Indirectly, we have covered another important point. You cannot include beef price when listing reasons for weak beef demand. Specifically, you cannot say demand for beef is weak because of "high beef prices." Price is part of the demand schedule, the set of price-quantity combinations, for beef--it cannot be a "demand shifter." Analysts and observers who use beef price in this way are really talking about the importance of price in determining quantity demanded, and we have learned that per-capita supplies or any other measure of quantity is not a correct measure of demand.

With these points in mind, it's time to get to the specifics. The facts about beef can be presented in several ways. A useful overall picture is shown in Figure 12 with per-capita consumption and inflation-adjusted beef prices shown as line plots. The general pattern since the late 1970s shows price and per-capita consumption trending down. Overall, that means offering and selling less product at lower prices, and you don't have to spend years studying economics to recognize that pattern means something is badly wrong on the demand side of the price equation.

Before looking at the data a second way, let's pause and review why the influence of price inflation has to be removed from the beef prices. To legitimately compare years, you want the price changes to be due to the economics of supply and demand, not just because all price levels are changing over time. If it is both price inflation and supply/demand forces that are moving prices, you cannot tell which part of the price change is due to price inflation and which part is due to shifts in supply and/or demand.

Dividing the prices by the Consumer Price Index (CPI, 1982-84=100) converts all the prices to a common denominator (to 1982-84 dollars) by removing the influence of inflation. It removes the price inflation influence and lets us focus on what the supply-demand balance is doing. After this is done, you can compare years and learn something useful.

Figure 13 shows the beef price and per-capita consumption data in a different way. Inflation-adjusted prices are on the vertical axis, and per-capita consumption is on the horizontal axis. Each year since 1960 is identified.

Recalling our earlier discussion, we know a demand curve passed through the price/per-capita consumption coordinate for each of the years. Recalling, too, that the demand curve is negatively sloping, an interesting perspective starts to develop. Each year since 1979 would appear to fall on a lower demand curve. (The years 1993-1995) may be an exception to this, but demand certainly was not increasing during that period. We will come back to this later and look at 1993-95 in more detail.)

Some estimates of magnitude are possible. From 1979 through 1986, per-capita supplies, and therefore per-capita consumption, were relatively constant around 78 pounds. The inflation-adjusted price for 1979 was $3.12 and for 1986 it was $2.07. That is a price decline of about 34 percent. If you avoid starting with the unusually high price in 1979 and use 1980, the price decline through 1986 was $2.88 to $2.07, a decline of 28 percent. Since the per-capita offerings and therefore per-capita consumption happened to be essentially constant, we can focus on price and conclude that demand for beef declined by at least 28 percent from 1979-80 through 1986. This is an economic hit to the industry of huge proportions.

After 1986, per-capita offerings started to decline as the industry downsized. It so happens that per-capita consumption for 1991 and for 1997 was the same at 67.2 pounds. Price was $2.12 in 1991, and declined to $1.74 in 1997, a drop of 18 percent. Weakness in demand during the 1990s has been nearly as bad as the dramatic declines in the 1980s.

In the face of this dramatic evidence, there has still been a longstanding tendency for producers and producer groups to refuse to accept that they have a problem. In the late 1980s, the National Livestock and Meat Board (NLMB) organized "demand strategy" conferences during the national summer meetings. Attention was focused on the growing demand problems and on what needed to be done to help correct the situation. There were even signs that NLMB staff, mostly trained in the physical sciences, were starting to understand what demand is and is not. Was there a light at the end of the tunnel? Would this growing awareness lead to progressive industry programs to do something about demand?

Within two to three years, however, the producer community and producer leaders started to complain about the time the demand strategy conferences were taking and about what it cost to organize and conduct a conference. It was taking time from their important committee work, cost too much, and they were getting tired of "having these agricultural economists coming to the conferences and talking about demand problems with the product." They could not and would not accept the fact consumers were finding fault with their beloved product.

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