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|
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 email@example.com 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.
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