Despite high prices beef demand hasn't fallen off.
By: Darrell Mark,SDSU Economics Adjunct Professor, SDSU Extension
Commercial beef production in the first and second quarters of 2014 was down 5.0% and 5.1%, respectively. After adjusting for imports, exports, and population changes, per capita beef consumption declined by 4.1% and 4.3% in the first two quarters. On an annual basis, beef consumption is projected to be about 54 lb per person in 2014 and is expected to fall to 53 lb per person in 2015. That’s down about 10 lb per person compared to the 1990s.
While consumption (i.e., "quantity demanded") is down, retail prices are sharply higher. In June 2014, retail Choice beef prices averaged a record $5.938 per pound, up $0.66 per pound from a year ago. All fresh retail beef prices (includes all quality grades) were also record high at $5.512 per pound.
Demand is a measure of both prices and quantity demanded. By definition, it is the schedule of prices consumers are willing and able to pay for various quantities of beef. Beef demand increases when prices and quantities increase and decreases when both prices and quantity demanded decreases. When prices and quantities move in opposite directions, demand could increase or decrease depending on the magnitude of each of the price moves and the elasticity (or responsiveness) of beef demand.
For the first quarter of 2014, beef consumption (quantity demanded) was 4.1% lower than a year ago. Real (i.e., inflation adjusted) choice beef prices were 4.9% higher compared to the first quarter of 2013. Assuming a constant elasticity of demand during that time period, the demand for choice beef increased 1.7% in the first three months of 2014 relative to a year ago. Beef consumption was down 3.7% in the second quarter of 2014 while real retail choice beef prices were 10% higher than a year ago. Choice beef demand, then, was about 7% higher in the second quarter of 2014 compared to a year ago. So, for the first half of 2014, the increases in real Choice beef prices offset the declines in quantity demanded such that beef demand increased.
This type of increase in beef demand, while good, does generate a couple of concerns. First, consumers are becoming accustomed to eating smaller quantities of beef. Should that carry forward to times when commercial beef production increases (due to increasing cattle numbers), beef demand could decline as retail prices decrease. Secondly, there are valid concerns about whether beef will "price itself out of the market." That’s a common phrase that really addresses whether the relative price ratio between beef and other competing meats will make the other meats relatively more attractive for consumers to purchase. Interestingly, even though retail beef prices have reached record high levels, the ratio of beef to pork prices is largely unchanged. This is due to the sharp increase in retail pork prices, which surpassed $4.05/lb in June 2014. Expansion has not occurred yet in the pork industry due to several factors, most notably the porcine epidemic diarrhea (PED) disease that has lowered hog slaughter in recent months. Even the poultry industry, which was expected to return to typical 3-4% growth levels this year, as failed to do so. As a result, the real beef-to-chicken price ratio hasn’t shown much increase until the second quarter of 2014.
Looking ahead, beef consumption is likely to decline for at least another year as the industry slowly starts to expand production. While higher retail prices are likely, it isn’t sure that the price increases can continue to offset reductions in quantity demanded so that beef demand actually increases. However, there are reasons to be optimistic about beef demand. Beef appears to be generating more positive attention and popularity amongst followers of social media and more media attention seems to be focused to the health attributes of lean beef. Restaurant sales have also been improving. In particular, fast-causal restaurants featuring hamburgers continue to gain popularity. Improvements in the general economy would also support better beef demand in the months ahead.