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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 7: Don't ignore the facts on demand just because you don't like the message they are delivering. Producers are getting tired of "having these agricultural economists coming to conferences and talking about demand problems with their product." They could not and would not accept the fact that consumers were finding fault with their beloved product. Part of the problem may be in our failure to help producers and their elected leaders understand what it all means. They often sense there is a problem because they know they are periodically in a cost-price squeeze, but it is sometimes hard to make that connection all the way up to what consumers are doing. What, exactly, does all this mean to the cattle producer? With that issue in mind, let's try to "put some numbers" on it. The 1991 to 1997 comparison is straightforward. In 1991, the average nominal price--before adjusting for inflation--was $2.88 per pound. From 1991 through 1997, the overall price level as measured by the CPI increased by 18 percent. If 1997 had been on the same demand curve as 1991, the 1997 nominal price would have been near 1.18 ($2.88) = $3.40 just due to price inflation. With a $2.88 retail price in 1991, Cattle Fax reported an average fed steer price of $74.28. If the price spreads in 1997 were the same relative to retail prices, a 1997 fed steer price can be calculated assuming demand was the same in 1997 as in 1991 and the $2.80 price had just "inflated" up to $3.40. With constant demand from 1991 through 1997, inflation would have boosted fed cattle prices to $87.69 in 1997. The actual fed cattle price in 1997 was $66.10, over $20 per hundredweight below the "derived" price of $87.69. This is obviously huge in terms of impact on producers and on the industry. Lower fed cattle prices translate directly to lower feeder cattle and calf prices. Producers get pushed out of business and inventory numbers decline. Price spreads can also make a difference. The farm-to-retail price spread did not increase as fast as price inflation, increasing by only 11 percent between 1991 and 1997. (Recall that the CPI increased 18 percent.) Those smaller price spread increases would have contributed to a still bigger price increase for cattle, and it might have been above $87.69 if demand in 1997 had been at 1991 levels. But let's keep things simple and use the $87.69. It was demand problems that brought price down to $66.10 compared to the "could have been" price of $87.69. Table 1 organizes some of the numbers and delivers a sobering message. The numbers tell the tale. Beef prices for 1997 did not "inflate" at all but were down to $2.81 from $2.88. The fed cattle picture is much worse, down to $66.10 from $74.28. These patterns developed during a 1991 to 1996 period that saw the average price for a 110-129 horsepower tractor go up 18.6 percent from $46,700 to $55,400. Self-propelled farm machinery increased 28 percent in price, and anhydrous ammonia went from $213 per ton in 1993 to $303 in 1996, an increase of over 42 percent. Small wonder the beef cattle sector is getting smaller. A brief detour is in order here before proceeding. If you are thinking that per-capita offerings would not have stayed at 67.2 pounds in the face of higher cattle prices and a price pushed up to $87.69 by inflation, you are absolutely right. Producers do respond to strong fed cattle prices and the better feeder and stocker cattle prices they bring, and there would have been a positive supply response even though the higher price for 1997 was due to price inflation. That certainly would be the case if costs of feed did not go up as fast as overall price inflation, and they did not prior to the record prices of 1996--and those high prices are now behind us. But back to the primary issue: The 1997 price in nominal terms was $66.10, not the $87.69 or even some intermediate price such as $80 that might have developed if supply had increased. All this would have happened if demand had just been able to stay at the same level in 1997 as compared to 1991. It did not, we know, and actually decreased by some 18 percent. And the price pressure from declining demand is relentless. Remember, it is the producer who is the primary recipient of the pain of lower prices after middlemen try to protect their margins by pushing the impact of consumers' refusal to pay anything but lower prices back down to the producer. A last anecdotal bit of evidence regarding the weak demand for beef is provided in Figure 14. The prices of major cuts from the chuck, round, loin, and ribeye are shown since 1978. These are nominal prices--they have not been adjusted for inflation. The CPI was 1.605 for 1997 and will average near 1.640 for 1998. Divide the recent prices that are shown for the chuck and round by 1.640 and you are down in the $.65 to $.70 range, less than one-half of the $1.30 to $1.50 prices in the 1982-84 base period! The chuck and round make up about 66 percent of the beef carcass, and the price pattern for cuts from both primals is dismal at best. If you take the price inflation out of the loin and ribeye cuts (divide the recent prices by 1.640), the prices for those cuts were also down relative to the 1982-84 base period. An important rule emerges from all this. Rule 8: You cannot ignore the message being sent by consumers when they will take smaller quantities of your product only at lower prices over time. That price pressure prompts the marketplace to look for a new market clearing price for cattle, and the only way the marketplace has of restoring a balance is to decrease supply and drive resources--and people--out of the beef business. Demand appears to be the key issue. It is not a supply issue. Resources have left beef, and some of those resources have moved into production of other food products--including pork and poultry. To the extent that poultry, for example, has been more profitable based strictly on efficiencies in production, we could argue that there is a supply-side instrument of change to all this--and there clearly is. But the dominant economic hit has come from the runaway train that is the lower and lower beef prices, prices so low they have destroyed profitability for many cattlemen. |
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