Will consumers resist high beef prices?

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You have probably heard someone say, “The demand for beef must be excellent because the prices are significantly higher.” This may or may not be true.

Beef Demand is a list of quantities consumers are willing and able to purchase within a price range. As expected, consumers buy less when prices rise. They buy more when prices fall. What is important is that the demand is the total amount of these price and amount pairs.

A line formed by these pairs falls down a chart, with price on the vertical axis and quantity on the horizontal axis. A lower price is paired with a higher quantity on this line of price-quantity pairs, and vice versa. The change from a pair with a higher price and a lower quantity on this line to a pair with a lower price and a higher quantity on this line is a quantity reaction that is exclusively driven by the price change. That is a change in the amount requested. It’s not a change in demand.

Economists use a formula to predict how much demand is likely to change if the price changes. It is called the price elasticity of demand.

Demand driver

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

In the April-June 2020 quarter, supply chain restrictions reduced the availability of beef and per capita consumption decreased 8.2% compared to the second quarter of 2019. Assuming that the price elasticity for beef is constant over time, retail prices for beef should have increased by 11.2%. The prices even rose by 17.1%. The unexpectedly high rise in prices is causing demand to rise. Instead of just sliding to a lower quantity and a higher price point on the demand curve, we had a new price-quantity pair on a new demand curve further to the right of the chart.

Sometimes signals are clear

Usually the price goes down as the quantity goes up. Sometimes the quantity goes up and the price goes up too. The crowd reacts to more than the price change. That means the demand is increasing.

In 2020, per capita beef consumption increased by 0.4% compared to 2019, and real (inflation-adjusted) beef prices increased by 8.4%. In the last 30 years there were also higher prices with higher quantities in 1999, 2000, 2004, 2012 and 2019.

Sometimes lower prices occur with smaller quantities. That says the demand for beef is falling. Per capita beef consumption declined and real beef prices declined in 1991, 1992, 1993, 1997, 2005 and 2009.

Unfortunately, the market offers only one price-volume pair at any given time. This makes it difficult to try to find out whether a change in quantity is simply a shift in an existing demand curve up or down due to a change in price (a change in the quantity demanded) or a change to a new demand curve (a change in demand). .

A demand index helps measure shifts on a new demand curve. Building a demand index requires data on domestic production, imports, exports and cold storage in order to derive a measure of the disappearance. This is then converted to a per capita basis by dividing by the U.S. population. The per capita disappearance is an approximation of the observed consumption. In reality, it measures supply per capita or availability. Beef is perishable. Every year, the amount of beef we consume roughly equals the amount of beef we produce. It is the price that makes the adjustment.

We can build a demand index that tells us the status of domestic beef demand at the consumer level, with the index representing total demand, not just retail store demand. This approach takes total consumption and treats the retail price as the shadow value for the product sold through hospitality establishments. A demand index works similarly to a barometer. The assessment should focus on the direction and relative magnitude of the change, rather than absolute values.

Understand volume signals

You may also hear someone say, “The demand for beef must be strong as a large amount is clearing the market.” This, too, can be true or false. What is the price at which the large quantity is sold? At lower prices, the demand can remain unchanged. If more is bought at the current price, the demand could actually be stronger. However, if less beef leaves the market than the price elasticity of demand suggests, demand may actually be lower.

In the April-June 2021 quarter, the demand for beef increased. Per capita consumption increased 9.6% compared to Q2 2020 when challenges related to COVID-19 limited the ability to convert cattle into beef. A nearly 10% increase in consumption should have reduced real retail beef prices by 10.7%, but in fact prices only fell 6.1%. The less than expected drop in prices says demand has improved.

Still little consumer resistance

Record high retail prices for beef have attracted a lot of attention. Should we expect consumers to push back against high prices? And even if it did, would it reduce producers’ incomes? Maybe, but maybe not. Both prices and quantities need to be considered because then, and only then, can you talk about all of the dollars available to the industry.

In the July-September 2021 quarter, per capita beef consumption was 6.0% lower than in the same three months of 2020, and retail beef prices adjusted for inflation rose 5.9%. The price elasticity of demand suggests that prices should have increased a bit more – say about 9.1%. That means that the beef demand index has decreased compared to the third quarter of 2020. Even so, the beef demand index is one of the top quarters in the data series that goes back to 1990.

Persistently high retail prices seem to signal strong consumer demand for beef – far from ruining demand. High prices are evidence that consumers “are ready and able” to buy a relatively large amount of beef.

The demand can certainly be observed in the future as some of the variables are expected to move in a wide range. For example, per capita consumption of beef is expected to decline in the next few years. It could drop from 58.4 pounds in 2020 to 55.0 pounds in 2023.

Effects on beef producers

In the depths of the Great Recession, beef demand eroded and then bottomed out in 2010. Since then, the demand for beef in general has increased, with some bumps along the way. The economic effects on producers are obvious. If consumer demand were still at 2010 levels, retail beef prices, and therefore beef prices, would be much lower than they are today. As consumer demand varies, the effects of inferred demand flow through the marketing chain to manufacturers.

Understanding shifts in inferred demand within the supply chain at specific points in time is complex. For example, even if consumers are willing to pay more for beef, the retailer who buys beef wholesale may not be willing to pay more. Likewise, the packer may not be willing to pay more for livestock that is fed. The main reason is the cost.

Retailers’ inferred wholesale beef demand reflects the prices they are willing and able to pay for a given amount of beef at the wholesale level. In a competitive market, the difference between the retail beef price and the wholesale beef price is the cost of moving wholesale beef to the retail meat crate. Suppose these costs increase. Retailers’ inferred wholesale beef demand is decreasing, which translates into a lower wholesale price for the same amount of beef delivered. Consumers do not change their retail demand; but the wholesale demand is changing.

Similarly, suppose that the cost of packagers increases significantly. Assume further that retail demand and wholesale demand remain stable. The demand for packers will shift downwards and the prices for fed livestock will fall.

Schulz is an animal economist from Iowa State University Extension.


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