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Virginia Cooperative Extension -
 Knowledge for the CommonWealth

Myths About Demand for Beef After September 11

Farm Business Management Update, December 2001

By Wayne Purcell

You cannot pick up a magazine without seeing the expressed concerns that the demand for beef has come down sharply in the face of all the economic uncertainty that was made worse by the tragedies on September 11. But no data-based evidence of a demand decrease is available as we move toward December 1. True, cattle prices are down from summer and early fall levels, and we know that box beef values are down in parallel fashion. But the consumer does not buy live cattle or boxed beef, and where the rubber hits the proverbial road and the consumer makes a choice shows no evidence of decreases in demand. Demand may still fall, but it has not happened yet, and I do not want us to talk ourselves into a recession in the beef business.

The table shows quarterly demand indices that Research Institute on Livestock Pricing at Virginia Tech (RILP) maintains for the industry. (Both yearly and quarterly indices are at www.aaec.vt.edu/rilp.) Quarter 3, 2001 shows an index (with 1997 as the baseline equal to 100) of 112.252, up from 109.758 in Quarter 3, 2000 and up from 110.0285 in Quarter 2, 2001. The Quarter 3 numbers for 2001 are in italics until the final numbers on per capita consumption are in, but any change is unlikely to be big enough to change the basic story linečthat through Quarter 3, 2001, the demand increases starting back in 1998 are still in place and are doing just fine.

Quarter 1 Quarter 2 Quarter 3 Quarter 4
Year 1980=100 1997=100 Year 1980=100 1997=100 Year 1980=100 1997=100 Year 1980=100 1997=100
1980 100 202.8719 1980 100 179.9934 1980 100 190.5221 1980 100 201.609
1981 93.74988 190.1922 1981 92.90148 167.2166 1981 101.8138 193.9779 1981 88.69112 178.8093
1982 83.41986 169.2355 1982 90.39086 162.6976 1982 93.253 177.6676 1982 84.88101 171.1277
1983 82.85526 168.0901 1983 90.18853 162.3334 1983 90.9415 173.2637 1983 81.00816 163.3197
1984 82.05223 166.4609 1984 85.92873 154.6661 1984 82.80115 157.7545 1984 81.02885 163.3614
1985 76.30916 154.8099 1985 85.23209 153.4122 1985 82.90996 157.9618 1985 73.10532 147.3869
1986 72.05904 146.1876 1986 81.64863 146.9622 1986 81.41323 155.1102 1986 71.49042 144.1311
1987 66.91679 135.7554 1987 73.81453 132.8613 1987 74.09044 141.1587 1987 66.82913 134.7335
1988 67.02789 135.9808 1988 73.97573 133.1514 1988 72.44845 138.0303 1988 64.77995 130.6022
1989 63.2419 128.3001 1989 69.34434 124.8153 1989 66.52813 126.7508 1989 64.19675 129.4264
1990 60.92563 123.601 1990 69.90953 125.8326 1990 65.57541 124.9357 1990 62.93019 126.8729
1991 60.38459 122.5034 1991 67.83538 122.0992 1991 64.85114 123.5558 1991 58.53338 118.0085
1992 57.57119 116.7958 1992 63.74106 114.7297 1992 60.96577 116.1533 1992 56.7405 114.3939
1993 56.15307 113.9188 1993 61.74775 111.1419 1993 60.53451 115.3316 1993 55.94812 112.7964
1994 54.99929 111.5781 1994 60.1328 108.2351 1994 57.59109 109.7238 1994 54.31535 109.5046
1995 53.25004 108.0294 1995 58.61526 105.5036 1995 58.30027 111.0749 1995 53.63333 108.1296
1996 53.47108 108.4778 1996 58.08509 104.5493 1996 53.77013 102.444 1996 51.7067 104.2453
1997 49.29218 100 1997 55.55758 100 1997 52.48734 100 1997 49.60097 100
1998 48.9202 99.24535 1998 54.11852 97.40978 1998 52.5777 100.1722 1998 50.15056 101.108
1999 48.88672 99.17744 1999 56.4942 101.6859 1999 54.66578 104.1504 1999 52.78435 106.418
2000 52.17043 105.8392 2000 58.1876 104.7339 2000 57.60904 109.758 2000 52.70459 106.2572
2001 53.71918 108.9811 2001 61.1292 110.0285 2001 58.91785 112.252      

Updated using per-capita consumption and retail beef price data from the Livestock Marketing Information Center website (http://lmic1.co.nrcs.usda.gov/), updated on October 23, 2001.

The index calculation is based on demand-constant prices compared to 1980 using an elasticity of -0.67. The index was then rescaled to 1997=100 so that changes from 1997 can be easily monitored. A current index of 105 means demand has increased 5% since 1997; an index of 96 means demand has decreased 4% in the same time span. The index values show how demand is changing but give no information on why it is changing. The index values are also a function of the -0.67 retail level demand elasticity, but the index does not change drastically for elasticity parameters of -0.5 to -0.8.

The October retail price for Choice beef is now available. It was $3.38/lb., up slightly from the September price and up $0.26/lb. from October, 2000. Commercial production for Quarter 4 appears to be up about 2.5% from 2000. With the decline in beef exports beef this year and the continued strong movement of imports, we are likely to see an increase in per capita supplies for fourth quarter when all the data are in. That supply increase will mean an increase in per capita consumption. Since per capita consumption is actually calculated as a disappearance number, we are not likely to see any huge buildup in inventories. We are still dealing with expectations, but the price for beef during November and December will have to come down $0.25/lb. or more and move back down to $3.25/lb. or lower before any year-to-year decrease in beef demand for Quarter 4 can or will be documented.

Producers should not make their herd building and investment decisions around someone's negative comments about beef demand built on supply and do not recognize that you can only talk about demand when you look at price and quantity data at the consumer level. We know that cattle prices are down and that the box beef values are down as well, but those decreases do not prove anything about beef demand. What we have been seeing since late summer is a huge increase in the margins that the retailers are extracting from the consumers. It has to be the case: cattle and box prices are down significantly and retail prices are flat around $3.38/lb., only a few cents per pound below the record high prices we recorded earlier this year. The chart shows monthly retail prices for 2000 through October, 2001 and the 5-year average of retail prices. The patterns on the chart certainly do not look negative for beef, not when you recognize that we are projected to see an increase in production during Quarter 4 compared to last year.

The message on demand must be correct. After nearly 20 years of travel to all corners of the country talking about this important subject, I sat down and wrote "Primer on Beef Demand" in spring 1998 and sent it unsolicited to about 400 agencies, producer association leaders, packers, retailers, politicians, and analysts. It was run in many magazines the following year, and it might have had something to do with the turn in beef demand that we saw starting in 1998. Maybe it is time to go back and read that simple piece again. It is available on the Internet at www.aaec.vt.edu/rilp, or you can get in touch with me if you need a hard copy. I can be reached by email at purcell@vt.edu or by telephone at (540) 231-7725. I am seeing lots of writers, including some in research institutions that ought to know better, who are assuming that declines in beef demand are behind the recent break in the fed cattle market and the related decline in our yearling and calf prices. I do not see evidence of any decreases, at least not yet, and producers who are making tough investment decisions need to know the facts as they decide what to do. It has been many years, perhaps back into the 1960s and early 1970s, since both the demand side for beef and the supply-side cycle have been lined up and supportive of activity at the cow-calf level. Virginia producers will see a good price scenario for the next several years and should not let anybody's incorrect assertions or assumptions about the state of the world in beef demand block what you need to do.

Contact the author at purcell@vt.edu

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