Measuring Beef Demand

James Mintert, Ph.D.

Professor & Extension State Leader Department of Agricultural Economics Kansas State University www.agmanager.info/livestock/marketing [email protected]

Kansas State University Department of Ag. Economics

A Picture of A Healthy Industry U.S. Cattle Inventory January 1, 1925-1975 140 130 120 110 100 90 80 70 60 50 25 30 35 40 45 50 Year Source: USDA & K-State Research & Extension 55 60 65 70 75 KSU Dept. of Ag Econ www.agmanager.info

Kansas State University Department of Ag. Economics

A Shrinking Industry Responding to a Lack of Profitability U.S. Cattle Inventory January 1, 1975-2006 140 130 120 110 100 90 80 70 60 Current inventory is about 26% smaller than in 1975 50 75 80 85 90 Source: USDA & K-State Research & Extension 95 00 05 KSU Dept. of Ag Econ www.agmanager.info

Kansas State University Department of Ag. Economics

Rising Productivity Is Partially Responsible

Dressed Beef Production .

Per Cow Per Year .

700 650 600 550 500 Beef Production Per Cow 30 Year Trend 450 400 350 300 250 200 50 55 60 65 70 75 80 Source: USDA & K-State Research & Extension .

Year 85 90 95 00 05 10 Kansas State University Department of Ag. Economics

But Declining Consumer Demand for Beef Was A Key Factor

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P Beef Market Equilibrium S P E D Q E Q

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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 -1.49

– 1% 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)

Kansas State University Department of Ag. Economics

How Do We Compute Demand Index?

Beef Demand Index equals Actual inflation adjusted retail beef price Expected inflation adjusted retail beef price X 100

Kansas State University Department of Ag. Economics

The Index Documents Demand Decline Beef Demand 1980-1998 Annual Retail Choice Beef Demand Index 100 90 80 70 60 94 88 86 83 79 76 50 40 30 70 69 66 65 62 59 58 56 55 53 51 50 20 10 0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 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.

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Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

Index Also Documents Demand Increase 1998-2004 Annual Retail Choice Beef Demand Index 100 90

Demand in ’04 Was Up About 25% from 1998 Level

80 70 60 50 40 30 20 50 52 54 56 10 0 98 99 00 01 Year Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index 55 02 59 03 63 04 KSU Dept. of Ag. Econ.

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Kansas State University Department of Ag. Economics

What Happened in 2005?

1998-2005 Annual Retail Choice Beef Demand Index 100 90 80 70 60 50 40 30 20

Beef Demand During All of ’05 Decreased About 4% But Demand in ’05 Was Still Up About 21% from 1998 Level

50 52 54 56 55 10 0 98 99 00 01 02 Year Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index 59 03 63 04 61 05 KSU Dept. of Ag. Econ.

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Kansas State University Department of Ag. Economics

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 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Year Source: USDA, Dept. of Commerce & K-State Ag. Econ.

Kansas State University Department of Ag. Economics

Downturn Got Underway in mid-2005 15% Quarterly Retail Choice Beef Demand Index % Change From Prior Year 10% 5% 0% -5% -10% -15% 98.1

99.1

00.1

01.1

02.1

03.1

Year & Quarter Source: USDA, Dept. of Commerce, & K-State Ag. Econ.

04.1

05.1

06.1

Kansas State University Department of Ag. Economics

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?

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What About The Impact of International Trade?

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U.S. Was A Net Exporter From 1981-2003

3.00

Net Exports of U.S. Cattle, Beef, & By-Products 1979-2005 2.50

2.00

1.50

1.00

0.50

0.00

-0.50

79 -1.00

-1.50

-2.00

81 83 85 87 89 91 93 95 97 99 01 03 Year Source: U.S. Dept. of Commerce & LMIC Net Exports = Exports - Imports 05 Kansas State University Department of Ag. Economics

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

Hong Kong Taiwan Destination Russia China Kuwait Egypt Other

Kansas State University Department of Ag. Economics

Beef Imports From Canada Decline

Annual Beef Imports From Canada .

1.2

1.0

0.8

0.6

0.4

0.2

0.0

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Year Source: USDA & LMIC, 2006 Projected Kansas State University Department of Ag. Economics

Result: U.S. Imports Falling Below 2005’s

Annual U.S. Beef Imports 4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

80 82 84 86 88 90 92 94 Source: USDA & LMIC, 2006-2008 Forecasts Year 96 98 00 02 04 06 08 Kansas State University Department of Ag. Economics

Long, Slow Road to Export Recovery

Annual U.S. Beef Exports 3.0

2.5

2.0

1.5

1.0

0.5

0.0

80 82 84 86 88 90 92 94 Source: USDA & LMIC, 2006-2008 Forecasts Year 96 98 00 02 04 06 08 Kansas State University Department of Ag. Economics

Export Recovery Means Net Beef Imports in 2007 Could Be 1/2 2004’s

Annual U.S. Net Beef Imports 3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

80 82 84 86 88 90 92 94 Source: USDA & LMIC, 2006-2008 Forecasts Year 96 98 00 02 04 06 08 Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

Are Retail Demand Changes Reflected At Farm Level?

Beef Demand Increased about 6% from 1998 – 2000 – 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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

Margin Shifts Can Mask Impact of Retail Demand Shifts Farm-To-Retail Marketing Margin Monthly, Inflation Adjusted 120 110 100 90 80 70 60 50 Jan 80 Jan 82 Jan 84 Jan 86 Jan 88 Jan 90 Jan 92 Jan 94 Year & Month Jan 96 Source: USDA, Dept. of Commerce, K-State Ag. Econ.

Jan 98 Jan 00 Jan 02 Jan 04 Jan 06

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

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

Kansas State University Department of Ag. Economics

Kansas State University Department of Ag. Economics