November 19, 2021
You have likely heard someone say, “Beef demand must be excellent as prices are sharply higher.” This may or may not be true.
Demand for beef is a schedule of quantities consumers are willing, and able, to buy over a range of prices. As you would expect, consumers buy less when prices rise. They buy more when prices fall. Importantly, demand is the entire set of those price and quantity pairs.
A line formed by those pairs slopes downward in a chart, with price on the vertical axis and quantity on the horizontal axis. A lower price will pair up with higher quantity on that line of price-quantity pairs, and vice versa. Moving from a pair with higher price and lower quantity on that line, to a pair with lower price and higher quantity on that line is a quantity response driven solely by the change in price. That is a change in quantity demanded. It is not a change in demand.
Economists use a formula to predict how much quantity demanded is expected to change as price changes. It is called price elasticity of demand.
Factors other than price drive changes in demand. Some are consumer income levels, prices of substitutes and complements, and consumer tastes and preferences.
In the April-June 2020 quarter, supply chain constraints trimmed beef availability, and per capita consumption fell 8.2% compared to the second quarter of 2019. Assuming the price elasticity for beef is constant over time, retail beef prices should have risen 11.2%. Prices actually surged 17.1%. The greater-than-expected rise in price says demand increased. Rather than merely sliding to a lower quantity and higher price point on the demand curve, we had a new price-quantity pair on a new demand curve farther to the right on the chart.
Sometimes signals are clear
Normally when quantity rises, the price falls. Sometimes quantity rises, and price also rises. Quantity is responding to more than the change in price. That is, demand is rising.
In 2020, per capita beef consumption rose 0.4% from 2019 and real (inflation-adjusted) beef prices spiked 8.4%. During the last 30 years, higher prices also came with higher quantities in 1999, 2000, 2004, 2012 and 2019.
Sometimes lower prices occur with lower quantities. That says beef demand is falling. Per capita beef consumption fell, and real beef prices slipped in 1991, 1992, 1993, 1997, 2005 and 2009.
Unfortunately, the market only provides one price-quantity pair at any one point in time. That complicates attempting to figure out whether a change in quantity is simply a shift up or down an existing demand curve due to a change in price (a change in quantity demanded), or a move to a new demand curve (a change in demand).
A demand index helps measure shifts to a new demand curve. Forming a demand index requires data on domestic production, imports, exports and cold storage to derive a disappearance measure. This is then converted to a per capita basis by dividing by the U.S population. Per capita disappearance is an approximation for observed consumption. In reality, it measures per capita supply or availability. Beef is perishable. Each year, the amount of beef we consume roughly equals the amount of beef we produce. It is price that does the adjusting.
We can construct a demand index that can tell us the status of domestic consumer-level beef demand where the index represents all demand, not just demand at retail outlets. This approach uses total consumption and treats the retail price as a shadow value for the product sold through food service outlets. A demand index functions much like a barometer. Evaluation should focus on direction and relative size of change — and not absolute values.
Understand volume signals
You may also hear someone say, “Beef demand must be strong, as a large quantity is clearing the market.” Again, this may be true or false. At what price is the large quantity being sold? If prices are lower, then demand may be unchanged. If more is being bought at the prevailing price, then demand could in fact be stronger. But if less beef is clearing the market than the price elasticity of demand would indicate, demand may actually be lower.
The April-June 2021 quarter saw beef demand rise. Per capita consumption surged by 9.6% compared to the second quarter of 2020, when COVID-19 related challenges constrained the ability to transform cattle into beef. An almost 10% rise in consumption should have trimmed real retail beef prices by 10.7%, but prices actually only slipped 6.1%. The smaller-than-expected price decline says demand improved.
Little consumer resistance yet
Record-high retail beef prices have drawn much attention. Should we expect consumer pushback against high prices? And even if they do, would this trim producer income? Maybe, but maybe not. Both prices and quantities need to be considered, because then and only then can you speak to the total dollars available for the industry.
The July-September 2021 quarter saw 6.0% lower per capita beef consumption than during the same three months in 2020, and inflation-adjusted retail beef prices rose 5.9%. Price elasticity of demand indicates prices should have risen a bit more — say roughly 9.1%. That means the beef demand index did fall compared to the third quarter of 2020. Still, the beef demand index is among the top quarters in the data series that dates back to 1990.
Persistent high retail prices appear to signal strong consumer-level beef demand — far from wrecking demand. High prices are evidence consumers are “willing, and able, to buy” a relatively high quantity of beef.
Demand is certainly something to watch going forward, as some of the variables are expected to move over a wide range. For example, per capita beef consumption is expected to trend lower over the next few years. It could slip from 2020’s 58.4 pounds to 55.0 pounds in 2023.
Impacts flow to beef producers
During the depths of the Great Recession, beef demand eroded and then bottomed out in 2010. Since then, beef demand has been generally rising, with some bumps along the way. The economic effect on producers is clear. If consumer demand was still at 2010’s level, retail beef prices, and hence, cattle prices, would be much lower than they are today. As consumer demand varies, the impacts flow down through the marketing chain to producers through derived demand.
Understanding shifts in derived demand within the supply chain at specific points in time is complex. For instance, even when consumers are willing to pay more for beef, the retailer buying wholesale beef may not be. Likewise, the packer may not be willing to pay more for fed cattle. The primary reason is costs.
Derived demand for wholesale beef by retailers reflects the prices they are willing, and able, to pay for a given quantity 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 getting wholesale beef to the retail meat case. Suppose those costs rise. Derived demand for wholesale beef by retailers declines, which equates to a lower wholesale price for the same quantity of beef supplied. Consumers aren’t changing their retail demand; but wholesale demand is changing.
Similarly, suppose packers’ costs rise significantly. Further suppose that retail demand and wholesale demand hold steady. Packer demand will shift down, and prices for fed cattle will decline.
Schulz is an Iowa State University Extension livestock economist.
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