Feed Lot Magazine Online, Editor's Desk

Volume VII Number 5

September/October 1999

Editor's Desk

by Bob Strong

This is the final article 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 9:

You must be capable of analyzing price/quantity data and be able to determine what is happening to demand from one time period to the next.

Procedures to be followed are not difficult. There are two basic approaches. For both approaches, you must adjust the price data for price inflation. You do that by dividing your prices by the consumer price index, and the current CPI the government uses sets 1982-84 as the base period. To illustrate, the average price at retail for Choice beef, the CPI, and inflation-adjusted prices are shown in the table for 1990-1997.

After removing the influence of overall price inflation, the first and easiest approach is to find two different years with per-capita consumption, and the important quantity measure at the same or very comparable levels. We noted earlier that both 1991 and 1997 showed 67.2 pounds per capita. That makes it convenient to suggest, as we did, that demand decreased by about 18 percent:

Often, per-capita consumption is not constant or equal in two separate years. A second approach is then needed. You use the concept of elasticity to calculate what price would have been if demand had been constant, and then compare it to the observed price to see what is happening. Let's illustrate using the 1993-95 period that, we noted earlier, appears to have been on or near a constant demand schedule.

The concept of elasticity is based on percentage changes in quantity and price, and is defined as:

Research-based estimates of elasticity differ slightly with different time periods, but most are around -0.67. Interpreted, this means a two percent change in quantity would be associated with a three percent change in price in the opposite direction if the demand surface is constant. In other words, retail prices must decline three percent to get consumers to buy two percent more beef if demand is constant.

Let's see what price change would have occurred from 1993 to 1995 with an elasticity of -.67 and demand constant:

and multiplying by 100, we get a 4.6 percent decrease in price associated with a 3.1 percent increase in quantity. (X is the price change that will occur in response to the quantity increase if elasticity is -.67 and demand is constant.)

This calculation says that if demand in 1993 and 1995 had been the same, the 3.1 percent increase in per-capita consumption would have prompted a 4.6 percent decrease in price. Graphically, we can show this as in Figure 15.

The $1.93 price on the chart is important. It is the inflation-adjusted (deflated) price that would have occurred for 1995 if elasticity is -.67 and the only change from 1993 to 1995 is a change in per-capita supply from 65.4 to 67.4 pounds. If demand in 1995 had been the same as in 1993, we would have seen a $1.93 inflation-adjusted price.

But the deflated price in 1995 was not $1.93; it was $1.87. It was not a huge decline, but this suggests demand from 1993 to 1995 decreased by 3.1 percent ($1.93 - 1.87 / 1.93). On the graph, the 67.4 pounds for 1995 would be associated with an actual price of $1.87. The demand curve for 1995 has to be below the one shown for 1993 if it goes through 67.4 pounds and $1.87. Visualize a new and lower demand curve for 1995 passing through 67.4 pounds and a price of $1.87. Draw it in!

It's worth some effort and a bit of digging. If demand is increasing, the sector can grow. Consumers' are paying prices high enough (because they like the product(s)) to bring periodic profits, stimulate new investments, and prompt a growth sector. If demand is going in the opposite direction, as it is in beef, the converse of all these responses occurs. Producers can't make a profit, investments flow out as they go out of business, and the sector downsizes and loses market share.

This exercise is about a primer on demand, but I would be remiss if I did not share my perceptions of why beef demand has decreased over a long time period. At several points, I have noted that the facts suggest consumers are not liking what they are being offered in the fresh beef counter. (There are comparable if less severe problems in the restaurant and institution businesses.) In specific terms, the survey and research evidence suggests the modern consumer wants:

Low-fat and low-cholesterol products;

High quality products that offer a favorable eating experience;

Products that offer that positive eating experience consistently and reliably; and

Products and product forms that are convenient and easy to prepare.

All this suggests that before we buy into "changing the genetics" as a proposed solution for the industry, something needs to be done about changing the offering of fresh beef. The genetic solution will take a long time, and there is no reason to wait to start correcting the demand problems. Turning what we are now producing into low-fat, tasty, and convenient eating experiences will help revitalize the industry while we are working on the genetics.

We will not fix the problems with the product, however, until we have broad recognition that we have major problems. But as I noted in the beginning, we can't get positioned to fix demand problems until we understand what demand is and is not. I hope this brief treatise has helped get us all on the right track with a better understanding of what needs to be done. Let me close by reviewing the important "rules" of this paper.

Per-capita consumption is not a measure of demand.

Talking about "strong demand" when increased quantities are being taken at sharply lower prices is wrong and misleading.

If demand is constant, the only way an increased per-capita supply will be taken by consumers is at lower prices.

You cannot use high beef prices as a reason for weak beef demand since price is part of the demand schedule.

If demand is decreasing, the only way to avoid losing market share is to reduce costs enough to keep the business viable.

A prolonged period of de-creasing demand for beef will eventually exceed even the most efficient producer's ability to cut costs.

Significant changes in pork and chicken prices can and will shift beef demand from year to year and within the year.

Changes in consumers' in-comes are usually positive for beef demand, but rising incomes during the 1980s and 1990s have not offset other problems.

The facts support a conclusion that, since 1979-80, consumers' preferences have turned away from beef as their needs and lifestyles have changed.

If these pervasive problems are not fixed and the negative trend in beef demand isn't at least stopped, the beef sector will lose market share and will trend toward a smaller industry for the foreseeable future.

It is time to do something, time to understand, time to get the product offering moved toward what the modern consumer wants and is willing to pay for.

The beef business was a growth sector during the 1960s and most of the 1970s. Consumers were developing a taste for marbled beef. Demand increased, and profit potential pulled new investments into the industry. Around 1979, consumers' attitudes started to change--but the product offering did not change. That divergence between what consumers want and are willing to pay for has continued to grow, and the industry has been forced into a pattern of disinvestment and downsizing. We will not find the investments and the programs that will be needed to correct these long-standing problems until we fully understand demand, what decreases in demand are and why they have occurred, and what will be required to reverse this disastrous trend and prompt increases in demand at the consumer level.

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