by James Mintert, Professor, Department of Agricultural Economics, Kansas State University

Is Beef Demand Poised To Rebound In 2003?
The modest rebound in beef demand that took place during 1999, 2000, and 2001 was great news for everyone involved in the beef business. Great news because it was a dramatic turnaround after a continuous decline in demand that lasted nearly two decades. Importantly, the long-term decline in beef demand is one of the principal reasons the U.S. cattle industry is smaller today than it was in the mid-1970s. So, a long term rebound in domestic beef demand could be a catalyst for a long term increase in profitability, which, in turn, could lead to cattle industry growth, instead of decline.

The accompanying graph of the retail Choice beef demand index illustrates how devastating the decline in beef demand during the 1980s and 1990s really was. The demand index is computed by calculating the market clearing beef price (adjusted for inflation) in any given year, if demand was held constant at the level observed in 1980. Year-to-year changes in beef supplies are used to calculate the "expected" retail beef price (expected if demand was held constant at the level observed in 1980) for any given year. The ratio of the actual inflation adjusted price to the "expected" inflation adjusted price, times 100, provides the beef demand index value for a particular year. An examination of the graph reveals that the retail Choice beef demand index value during 1998 was about 50, a demand decline of 50 percent in less than twenty years.

Fortunately, beef demand started to rebound in late 1998 with more improvements showing up in 1999, 2000, and most of 2001. There are a number of reasons why consumer demand rebounded. Some of the demand increase was attributable to strong growth in the U.S. economy, which helped propel consumers' disposable income to new heights. But a shift in attitudes on the part of consumers also played a role as consumers "rediscovered" beef. And this change in attitude took place at a time when the beef industry was just starting to bring to market a myriad new products, many of which appealed to today's time strapped consumers because they could be prepared easily and quickly.

But beef demand showed signs of weakening in late 2001, following the terrorist attacks on September 11th. Sharp declines in business travel resulted in widespread weakness in the hotel, restaurant, institutional sector, during fall 2001. A demand index calculated using wholesale beef prices, instead of retail prices, indicates that wholesale beef demand during the fourth quarter of 2001 was about seven percent weaker than during fourth quarter 2000. And the demand weakness continued into 2002, exacerbated by unexpectedly large increases in competing meat supplies, especially poultry. The weakness in beef demand was ultimately reflected in USDA's retail Choice beef prices and the annual retail beef demand index for 2002 dipped below the prior year by about one percent.

Will 2003 be a repeat of 2002 with retail beef demand declining again or will beef demand resume the climb that got underway in the late 1990s? The answer of course is, it depends.

War clouds on the horizon make forecasting beef demand even more difficult than normal. It depends in part on how the crisis in Iraq is resolved and also on what takes place on the Korean peninsula. Disruptions in trade flows to trading partners around the world would boost supplies of competing meats in the U.S. market, causing beef demand to shift down.

War clouds on the horizon make forecasting beef demand even more difficult than normal.

But there are some encouraging signs that make it appear that beef demand is poised to rebound in 2003. Wholesale beef demand bounced back late in 2002, rising two to three percent above the fourth quarter of 2001. The modest rise in wholesale beef demand during the latter stages of 2002 could be a leading indicator for 2003 as consumers again come back to beef. ©