In the past few days, two economists have proposed that the old rules about consumers substituting other meats for beef may not apply today.
Both Derrell Peel of Oklahoma State University and Glynn Tonsor of Kansas State University say the current situation is unprecedented and may signal new times with new, as-yet-unknown rules about consumers replacing high-priced beef with pork and chicken.
Tonsor says the synopsis we all carry in our subconscious about consumers trading beef for chicken or pork on a basis of rough equality with price the major determining factor came from two meat demand studies in the timeframe 1970 to 1993.
Two more recent studies, both in which Tonsor was involved, used data from 1982 to 2008 and found beef and chicken and pork do not substitute so readily in consumers' minds and grocery baskets.
Tonsor says, "the clear implication of changes suggested by these four studies is that the magnitude of substitution from beef to competing meat products may well be declining over time."
He suggests the influence of price on consumer substitution of other meats for beef may be effected by several factors over that nearly 50 years past. Tonsor adds this may include an increase in dual-income households and in the amount of food eaten away from home.
"While there will always be an economically relevant impact of developments in the pork and poultry industry on the beef industry, there is no reason to believe those impacts must be the same as they were in the past," he adds.
Peel suggests the same things and notes ongoing record retail prices, along with new signs of positive shifts in economic models measuring actual consumer demand for beef.
Peel makes note of these things:
• Choice retail beef prices jumped more than 9 cents per pound in April to a new record level at $640.20 cents per pound, up 9% from one year ago and up 22.5% from April, 2013.
• Choice retail beef prices averaged 12.4% higher for the first four months of 2015 compared to 2014.
• The All Fresh retail beef price decreased fractionally to $605.40 per pound in April, up 10.4% from last year and up 24.5% from two years ago.
• The category "All Fresh" retail beef prices have averaged 14.1% higher for the year as of May, compared with the same period last year.
• In 2014, retail beef consumption was 54.3 pounds per capita, down 3.7% from 2013, while All-Fresh retail beef prices increased 13.4%.
Peel explains that the core of beef demand is the relationship between what economists call the "own-price elasticity" of beef and the quantity of beef consumption. The own-price elasticity measures the responsiveness of the quantity which consumers demand of a product in relationship to price.
For example, consumers might increase beef consumption more for a $1 reduction in price than they would increase lamb consumption for that same $1 reduction in price. It's the responsiveness of the particular product being measured, in this case beef.
Peel explains further that at a given demand level, an increase in beef price is expected to decrease the quantity of beef consumed. On the other hand, a decrease in beef quantity is expected to result in higher beef prices for a given demand level. Research has established this relationship based on historical data.
Competing meats matter.
Peel adds in addition to beef's internal price and quantity relationship, beef demand at all times depends on factors outside the beef industry. Of course, these include the prices of competing meats, especially including pork and poultry. This is the great new unknown, according to these economists, but Peel thinks beef sales compared to poultry and pork sales so far are hopeful signs for beef demand.
In 2014, retail pork prices increased 10.3% year over year, while retail broiler prices were unchanged, year over year.
The good news.
With all this considered, the demand index from the Livestock Marketing Information Center shows that beef demand in 2014 increased over the 2013 index level and, in fact, was at the highest level on an annual basis since 2005.
Peel says this means that beef demand was stronger in 2014, even after accounting for the beef price and quantity relationship and changes in pork and poultry prices. The demand index for the first quarter of 2015 increased even more compared with the same period last year and was the highest first quarter beef demand index since 1991.
"Explaining the strength in beef demand is complicated because so many factors affect demand and because the current level of consumption is historically low," Peel adds.
"It could be that the entire demand relationship has changed, [meaning] beef demand has shifted higher. I suspect that it is more related to the current level of consumption. Beef demand is less sensitive to higher prices when the quantity available for consumption is so low."
Peel adds that with no previous data at these consumption levels, there is no demand research to anticipate the impacts of quantity changes on retail beef prices in this situation.
"In economists' jargon, beef demand appears to be more inelastic at the current level of beef consumption. That seems to be the principal lesson of beef demand in 2014," he says.
Pork and poultry losing clout?
The prospects for overall 2015 meat demand appear significantly different than what occurred in 2014.
Much of the focus in 2015 has been on the fact that pork and poultry production are higher and growing. Adding to that are weak exports for both pork and poultry, plus recent export-market closures due to avian influenza. That equals more supply.
Therefore, domestic consumption of beef's direct competition is expected to jump sharply in 2015, says Peel.
USDA has forecast per capita consumption of pork in 2015 will increase more than 6.5% from 2014 levels. Per capita broiler consumption in 2015 is expected to increase more than 6%, compared with 2014 consumption.
"And yet retail beef prices continue to push higher, especially relative to the other meats," Peel says. "The ratio of retail beef-to-poultry prices has exceeded 3.0 for the first time ever for six of the last seven months, meaning that retail beef prices are over three times retail broiler prices."
He added that this price ratio has risen sharply since January 2014 until we have the record levels at mid-year.
For comparison, the average beef-to-broiler retail price ratio from 2009-2013 was 2.40. Likewise, the retail-beef-to-pork price ratio has risen to record levels in the same timeframe as growing pork supplies have dragged down retail pork prices relative to beef. The retail-beef-to-pork price ratio jumped to 1.61 in April on sharply lower retail pork prices. This compares with an average retail-beef-to-pork price ratio of 1.33 in 2009-2013.
Another beef demand lesson in 2015 seems to be that the cross-price effects between beef and competing meats is also smaller than expected at current beef consumption levels.
Many people say that retail beef prices like we have today cannot be sustained in the face of cheaper pork and poultry. Peel said that may be true, but the evidence is growing that beef prices may not adjust much as long as beef consumption is record low.
Industry estimates are for beef production to decrease another 1-2% in 2015, but Peel said increased net beef imports may result in a fractional increase in per capita domestic beef consumption this year.
He predicts beef production will grow slowly through 2016 and into 2017 and that per capita beef consumption may actually drop in 2016 if beef exports recover a bit and beef imports moderate as expected.
Peel says he believes beef demand is stronger than expected and the potential for cheaper pork and poultry to limit that performance is less than many suppose.
Only time and a rear-view mirror will tell.