Measuring Beef Demand

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1 Measuring Beef Demand James Mintert, Ph.D. Professor & Extension State Leader Department of Agricultural Economics Kansas State University

2 A Picture of A Healthy Industry U.S. Cattle Inventory January 1, Year KSU Dept. of Ag Econ Source: USDA & K-State Research & Extension Million Head

3 A Shrinking Industry Responding to a Lack of Profitability 140 U.S. Cattle Inventory January 1, Million Head Current inventory is about 26% smaller than in Year KSU Dept. of Ag Econ Source: USDA & K-State Research & Extension

4 Rising Productivity Is Partially Responsible Pounds Dressed Beef Production. Per Cow Per Year. Beef Production Per Cow 30 Year Trend Source: USDA & K-State Research & Extension. Year

5 But Declining Consumer Demand for Beef Was A Key Factor

6 Beef Market Equilibrium P S P E D Q E Q

7 Beef Market Equilibrium P S demand decline P E P 1 Q E D 1 D Q

8 Goal of Beef Demand Index Provide a simple way of tracking demand changes Provide approximate measure of demand shift, compared to base year & recent years 1980 used as base year Coincides with approximate start of demand decline

9 How Do We Compute Demand Index? Adjust all prices for inflation using an inflation index (Consumer Price Index) Need to differentiate between movement along an existing demand curve & shifts in demand Price changes attributable to changes quantity are simply movement along an existing demand curve

10 Beef Market Equilibrium P S S 1 P E P 1 Movement from P E to P 1 is movement along an existing demand curve, i.e., no demand shift D Q E Q 1 Q

11 How Do We Compute Demand Index? So we first compute an expected inflation adjusted beef price Expected beef price uses price in base year as starting point Use a measure of how responsive beef prices are to changes in quantity to calculate expected price Calculate expected price, if demand was held constant at base year s level, based upon change in per capita beef quantity available since base year

12 Beef Demand Index & Price Responsiveness to Supply Shifts Price Flexibility provides a measure of percentage price change expected given a 1% supply change Price Flexibility used is % per capita supply increase expected to yield 1.49% decline in inflation adjusted price Actual index values dependent on choice of price flexibility, but pattern of demand largely unchanged (Marsh, 2003)

13 How Do We Compute Demand Index? Beef Demand Index equals Actual inflation adjusted retail beef price Expected inflation adjusted retail beef price X 100

14 The Index Documents Demand Decline Beef Demand Annual Retail Choice Beef Demand Index Index Value Year Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index KSU Dept. of Ag. Econ.

15 Beef Demand Decline Was Devastating What s the linkage between retail beef demand & cattle producers? Retailers demand for wholesale beef is derived from demand for retail beef products Packer demand for fed cattle is derived from demand for wholesale beef products Feedlot demand for calves & feeder cattle is derived from demand for fed cattle

16 Beef Demand Decline Was Devastating Who bore brunt of long-term beef demand decline? Feedlots & beef processors? No, margin operators adjusted to demand reductions Answer: Cow-calf producers How? Lower returns for cow-calf producers Labor Land Other capital Why? Industry size decisions are made by cow-calf producers

17 Index Also Documents Demand Increase Index Value Annual Retail Choice Beef Demand Index Demand in 04 Was Up About 25% from 1998 Level Year Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index KSU Dept. of Ag. Econ.

18 What Happened in 2005? Index Value Annual Retail Choice Beef Demand Index Beef Demand During All of 05 Decreased About 4% But Demand in 05 Was Still Up About 21% from 1998 Level Year Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index KSU Dept. of Ag. Econ.

19 Demand Improved Steadily from 98 through 04 Downward Blip in 02 Following 9/11 10% Annual Retail Choice Beef Demand Index % Change From Prior Year % Change From Prior Year. 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Year Source: USDA, Dept. of Commerce & K-State Ag. Econ.

20 Downturn Got Underway in mid % Quarterly Retail Choice Beef Demand Index % Change From Prior Year 10% % Change from Prior Year 5% 0% -5% -10% -15% Year & Quarter Source: USDA, Dept. of Commerce, & K-State Ag. Econ.

21 Beef Demand Shifters What s been taking place recently? Demand index does not indicate why shifts occur Possible reasons for recent downturn Low carb diet effect has worn off Larger chicken supplies Consumer s disposable income growth slowing Expect more domestic demand weakness How do we turn this around?

22 What About The Impact of International Trade?

23 U.S. Was A Net Exporter From Net Exports of U.S. Cattle, Beef, & By-Products Billion $ Source: U.S. Dept. of Commerce & LMIC Year Net Exports = Exports - Imports

24 Top 5 Importers Accounted for 91% of U.S. Exports Value (Thousand $).. $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 Top 10 Importers of U.S. Beef Ranked by Value of Imports in 2003 Other Category Consists of All Other Destinations U.S. needs to recapture these markets to regain $ s s and volume $0 Japan Mexico S. Korea Canada Hong Kong Source: USDA-FAS Taiwan Russia China Kuwait Egypt Other Destination

25 Beef Imports From Canada Decline 1.2 Annual Beef Imports From Canada. 1.0 Billion Pounds Source: USDA & LMIC, 2006 Projected Year

26 Result: U.S. Imports Falling Below 2005 s Annual U.S. Beef Imports Billion Lbs Year Source: USDA & LMIC, Forecasts

27 Long, Slow Road to Export Recovery 3.0 Annual U.S. Beef Exports 2.5 Billion Lbs Year Source: USDA & LMIC, Forecasts

28 Export Recovery Means Net Beef Imports in 2007 Could Be 1/ s Annual U.S. Net Beef Imports Billion Lbs Year Source: USDA & LMIC, Forecasts

29 Are Retail Demand Changes Reflected At Farm Level? 1% increase in beef demand index increases Slaughter cattle price by 0.49% Slaughter cattle supply by 0.17% Feeder cattle price by 0.12% Feeder cattle supply by 0.34% Source: Marsh, American Journal of Ag. Econ., 2003

30 Are Retail Demand Changes Reflected At Farm Level? Beef Demand Increased about 6% from Boosted consumer spending on beef by $2.16 billion Estimated producer share about 42% Estimated processor & retailer share about 58% Source: Marsh, American Journal of Ag. Econ., 2003

31 Do Farm Level Demand Changes Mirror Retail Demand Shifts? Spread between retail and farm level prices is variable Variability attributable to variety of factors Volume Capacity utilization

32 Margin Shifts Can Mask Impact of Retail Demand Shifts 120 Farm-To-Retail Marketing Margin Monthly, Inflation Adjusted 110 Cents per Lb. (Retail Weight) Jan- 80 Jan- 82 Jan- 84 Jan- 86 Jan- 88 Jan- 90 Jan- 92 Jan- 94 Jan- 96 Jan- 98 Jan- 00 Jan- 02 Jan- 04 Jan- 06 Source: USDA, Dept. of Commerce, K-State Ag. Econ. Year & Month

33 Retail vs. Farm Level Demand Policy Implications Retail beef demand is primary demand Demand for fed & feeder cattle derived from retail beef demand Retail beef demand shifts are felt at farm level In short run other factors, primarily margin variation, can mask impact of retail beef demand shifts In long run, consumer demand is paramount

34 Index Concerns Quality of retail price data Relying on Bureau of Labor Statistics prices Prices are not volume weighted Omits all of HRI trade

35 Improving The Index Develop Index using scanner based retail price data Included in Mandatory Price Reporting legislation Scanner based prices are volume weighted Better measure of what consumers pay But we need A longer data series Research that documents price flexibility with new prices Still omits HRI trade Longer term is a step in the right direction

36 Is Another Demand Measure Needed? What s the objective? Consumer initiative decisions should rely on consumer level demand information Demand measures at other marketing levels Wholesale Farm Will be driven in part by margin variation

37 Is Another Demand Measure Needed? Demand Indexes do not explain why demand shifted Development of other demand measures will necessitate research/information regarding why demand measures differ Differences will focus heavily on margin variation

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