Measuring Beef Demand

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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]

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A Picture of A Healthy Industry

U.S. Cattle Inventory January 1, 1925-1975 50 60 70 80 90 100 110 120 130 140 25 30 35 40 45 50 55 60 65 70 75 Year M illio n H ea d

Source: USDA & K-State Research & Extension

KSU Dept. of Ag Econ www.agmanager.info

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U .S. Cattle Inventory January 1, 1975-2006 50 60 70 80 90 100 110 120 130 140 75 80 85 90 95 00 05 Year M illio n H ea d

So urce: USDA & K-State Research & Extensio n KSU Dept. o f Ag Eco n

A Shrinking Industry

Responding to a Lack of Profitability

Current inventory is about 26%

smaller than in 1975

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Rising Productivity Is Partially Responsible

Dressed Beef Production

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Per Cow Per Year

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200 250 300 350 400 450 500 550 600 650 700 50 55 60 65 70 75 80 85 90 95 00 05 10 Year P ounds

Beef Production Per Cow 30 Year Trend

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But Declining Consumer Demand for Beef

Was A Key Factor

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D

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D

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Beef Market Equilibrium

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11 demand decline

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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

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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

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Beef Market Equilibrium

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11 Movement from PE _to P1 _{is movement} along an existing demand curve, i.e., no demand “shift”

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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

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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)

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How Do We Compute Demand Index?

Beef Demand Index equals

Actual inflation adjusted retail beef price

X 100

Expected inflation adjusted retail beef price

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The Index Documents Demand Decline

Beef Demand 1980-1998

Annual Retail Choice Beef Demand Index

88 86 ₈₃ 79 76 70 69 66 65 62 59 58 56 55 _{53 51} 94 50 0 10 20 30 40 50 60 70 80 90 100 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Year In d ex V al u e

Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

KSU Dept. of Ag. Econ. www.agmanager.info

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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

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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?

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Annual Retail Choice Beef Demand Index 52 54 56 55 59 63 50 0 10 20 30 40 50 60 70 80 90 100 98 99 00 01 02 03 04 Year In d ex V al u e

Index Also Documents Demand Increase

1998-2004

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What Happened in 2005?

1998-2005

Annual Retail Choice Beef Demand Index

52 54 56 55 59 63 61 50 0 10 20 30 40 50 60 70 80 90 100 98 99 00 01 02 03 04 05 Year In d ex V al u e

Beef Demand During All of ’05 Decreased About 4%

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Demand Improved Steadily from ’98 through ’04

Downward Blip in ’02 Following 9/11

A n n u a l R e ta il C h o ic e B e e f D e m a n d In d e x

% C h a n g e F ro m P rio r Y e a r -1 0 % -8 % -6 % -4 % -2 % 0 % 2 % 4 % 6 % 8 % 1 0 % 8 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 Y e a r % Change From P rior Ye ar . S o u rc e : U S D A , D e p t. o f C o m m e rc e & K -S ta te A g . E c o n .

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Downturn Got Underway in mid-2005

Q u a rte rly R e ta il C h o ic e B e e f D e m a n d In d e x

% C h a n g e F ro m P rio r Y e a r -1 5 % -1 0 % -5 % 0 % 5 % 1 0 % 1 5 % 9 8 .1 9 9 .1 0 0 .1 0 1 .1 0 2 .1 0 3 .1 0 4 .1 0 5 .1 0 6 .1 Y e a r & Q u a rte r % Change f rom P rior Y ear S o u rc e : U S D A , D e p t. o f C o m m e rc e , & K -S ta te A g . E c o n .

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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

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

1979-2005 -2.00 -1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50 3.00 79 81 83 85 87 89 91 93 95 97 99 01 03 05 Year B illio n $

Source: U.S. Dept. of Commerce & LMIC Net Exports = Exports - Imports

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Top 5 Importers

Accounted for 91% of U.S. Exports

T o p 1 0 Im p o rte rs o f U .S . B e e f

R a n k e d b y V a lu e o f Im p o rts in 2 0 0 3 O th e r C a te g o ry C o n s is ts o f A ll O th e r D e s tin a tio n s $ 0 $ 2 0 0 ,0 0 0 $ 4 0 0 ,0 0 0 $ 6 0 0 ,0 0 0 $ 8 0 0 ,0 0 0 $ 1 ,0 0 0 ,0 0 0 $ 1 ,2 0 0 ,0 0 0 $ 1 ,4 0 0 ,0 0 0 $ 1 ,6 0 0 ,0 0 0 J a p a n M e x ic o S . K o re a C a n a d a H o n g K o n g T a iw a n R u s s ia C h in a K u w a it E g y p t O th e r D e s tin a tio n Valu e ( T ho u san d $) . . S o u rc e : U S D A -F A S

U.S. needs to

recapture these

markets to regain

$

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Beef Imports From Canada Decline

Annual Beef Imports From Canada

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0.0 0.2 0.4 0.6 0.8 1.0 1.2 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Year B illio n P o u n d s .

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

Annual U.S. Beef Imports

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Year B illio n L b s .

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Long, Slow Road to Export Recovery

Annual U.S. Beef Exports

0.0 0.5 1.0 1.5 2.0 2.5 3.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Year B il li on Lbs .

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Export Recovery Means Net Beef

Imports in 2007 Could Be 1/2 2004’s

Annual U.S. Net Beef Imports

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Year B illio n L b s .

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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%

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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%

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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

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Margin Shifts Can Mask Impact

of Retail Demand Shifts

F arm -T o-R etail M arketing M argin

M onthly, Inflation A djusted

50 60 70 80 90 100 110 120 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Y ear & M onth