Will consumers resist high beef prices?


You’ve probably heard someone say, “The demand for beef must be great because the prices are so much higher. This may or may not be true.

Beef demand is a calendar of the quantities that consumers are willing and able to buy over a range of prices. As you would expect, consumers buy less when prices rise. They buy more when the prices go down. It is important to note that demand is all of these price and quantity pairs.

A line formed by these pairs goes down in a chart, with the price on the vertical axis and the quantity on the horizontal axis. A lower price will associate with a higher quantity on this line of price-quantity pairs, and vice versa. Going from a pair with a higher price and a lower quantity on that line to a pair with a lower price and a higher quantity on that line is a quantity response driven only by the price change. It is a change in the quantity demanded. It is not a change in demand.

Economists use a formula to predict how much the quantity demanded should change based on price changes. This is called the price elasticity of demand.

Demand drivers

Factors other than price cause changes in demand. Some are the income levels of consumers, the prices of substitutes and supplements, and the tastes and preferences of consumers.

During the April to June 2020 quarter, supply chain constraints reduced the availability of beef and per capita consumption fell 8.2% from the second quarter of 2019. Assuming the Beef’s price elasticity is constant over time, retail beef prices should have increased by 11.2%. Prices actually went up 17.1%. The larger-than-expected price increase indicates that demand has increased. Rather than just sliding to a lower quantity and higher price on the demand curve, we had a new price-quantity pair on a new demand curve further to the right on the chart.

Sometimes the signals are clear

Normally, when the quantity increases, the price decreases. Sometimes the quantity increases and the price also increases. Quantity responds to more than the change in price. That is, the demand is increasing.

In 2020, per capita beef consumption increased by 0.4% compared to 2019 and real prices (adjusted for inflation) increased by 8.4%. Over the past 30 years, higher prices have also come with higher quantities in 1999, 2000, 2004, 2012 and 2019.

Sometimes lower prices occur with lower quantities. However, the demand for beef is declining. Per capita beef consumption fell and real beef prices fell in 1991, 1992, 1993, 1997, 2005 and 2009.

Unfortunately, the market provides only one price-quantity pair at any given time. This complicates the attempt to determine whether a change in quantity is simply an upward or downward shift in an existing demand curve due to a price change (a change in quantity demanded) or a shift to a new one. demand curve (a change in demand).

A demand index measures changes towards a new demand curve. The formation of a demand index requires data on domestic production, imports, exports and cold storage to derive a measure of disappearance. This is then converted to a per capita basis by dividing by the US population. The disappearance per capita is an approximation of the observed consumption. In reality, it measures supply or availability per capita. Beef is perishable. Each year, the amount of beef we eat is roughly equal to the amount of beef we produce. It is the price that makes the adjustment.

We can construct a demand index that can tell us the state of demand for beef at the domestic consumer level, where the index represents all demand, not just demand at retail outlets. This approach uses total consumption and treats the retail price as a dummy value for the product sold in food outlets. A demand index works much like a barometer. Assessment should focus on the direction and relative magnitude of change – not absolute values.

Understanding volume signals

You may also hear someone say, “The demand for beef must be strong, because a large quantity is freeing the market.” Again, this can be true or false. At what price is the large quantity sold? If prices are lower, demand may be unchanged. If more is bought at the going price, then demand might actually be higher. But if less beef cleans the market than the price elasticity of demand indicates, demand may actually be less.

The April-June 2021 quarter saw demand for beef increase. Per capita consumption jumped 9.6% from the second quarter of 2020, when challenges from COVID-19 limited the ability to turn cattle into beef. A nearly 10% increase in consumption should have reduced real retail beef prices by 10.7%, but prices actually only slipped 6.1%. The smaller-than-expected price drop indicates that demand has improved.

Little consumer resistance yet

Record retail beef prices have attracted a lot of attention. Should we expect consumers to decline in the face of high prices? And even if they did, would it reduce producers’ incomes? Maybe, but maybe not. The prices and quantities should be taken into account, because it is then and only then that you can talk about the total dollars available to the industry.

The July-September 2021 quarter saw per capita beef consumption 6.0% lower than the same three months in 2020, and inflation-adjusted retail beef prices rose 5.9% . The price elasticity of demand indicates that prices should have increased a little more, say about 9.1%. This means that the beef demand index has fallen from the third quarter of 2020. Nonetheless, the beef demand index is among the best quarters in the data series dating back to 1990.

Persistent high retail prices seem to indicate strong consumer demand for beef, far from destroying demand. The high prices are proof that consumers are “willing and able to buy” a relatively large amount of beef.

Demand is definitely something to watch in the future, as some of the variables are expected to move over a wide range. For example, per capita beef consumption is expected to tend to decline over the next few years. It could drop from 58.4 pounds in 2020 to 55.0 pounds in 2023.

Impacts flock to beef producers

At the height of the Great Recession, demand for beef eroded and then hit a low in 2010. Since then, demand for beef has generally increased, with a few bumps along the way. The economic effect on producers is clear. If consumer demand were still at the 2010 level, retail beef prices, and therefore cattle prices, would be much lower than they are today. As consumer demand fluctuates, impacts trickle down the marketing chain to producers through derivative demand.

Understanding the changes in derivative demand within the supply chain at specific times is complex. For example, even when consumers are willing to pay more for beef, the retailer who buys beef wholesale may not be. Likewise, the packer may not be willing to pay more for fattened livestock. The main reason is the cost.

The derived demand for wholesale beef by retailers reflects the prices they are willing and able to pay for a given quantity of beef at the wholesale level. In a competitive market, the difference between the retail price of beef and the wholesale price of beef is the cost of getting wholesale beef to the retail meat store. Suppose these costs increase. The derived demand for wholesale beef by retailers is declining, which equates to a lower wholesale price for the same amount of beef supplied. Consumers do not change their retail demand; but wholesale demand is changing.

Likewise, suppose that the costs of the packers increase considerably. Suppose further that both retail and wholesale demand hold up. Demand from packers will decline and feeder cattle prices will decline.

Schulz is a livestock economist at the Iowa State University Extension.

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