Myths About Demand for Beef After September 11

Farm Business Management Update, December 2001

By Wayne Purcell

You cannot pick up a magazine without seeing the expressed concerns that the demand for beef has come down sharply in the face of all the economic uncertainty that was made worse by the tragedies on September 11. But no data-based evidence of a demand decrease is available as we move toward December 1. True, cattle prices are down from summer and early fall levels, and we know that box beef values are down in parallel fashion. But the consumer does not buy live cattle or boxed beef, and where the rubber hits the proverbial road and the consumer makes a choice shows no evidence of decreases in demand. Demand may still fall, but it has not happened yet, and I do not want us to talk ourselves into a recession in the beef business.

The table shows quarterly demand indices that Research Institute on Livestock Pricing at Virginia Tech (RILP) maintains for the industry. (Both yearly and quarterly indices are at www.aaec.vt.edu/rilp.) Quarter 3, 2001 shows an index (with 1997 as the baseline equal to 100) of 112.252, up from 109.758 in Quarter 3, 2000 and up from 110.0285 in Quarter 2, 2001. The Quarter 3 numbers for 2001 are in italics until the final numbers on per capita consumption are in, but any change is unlikely to be big enough to change the basic story line‹that through Quarter 3, 2001, the demand increases starting back in 1998 are still in place and are doing just fine.

Quarter 1			Quarter 2			Quarter 3			Quarter 4
Year	1980=100	1997=100	Year	1980=100	1997=100	Year	1980=100	1997=100	Year	1980=100	1997=100
1980	100	202.8719	1980	100	179.9934	1980	100	190.5221	1980	100	201.609
1981	93.74988	190.1922	1981	92.90148	167.2166	1981	101.8138	193.9779	1981	88.69112	178.8093
1982	83.41986	169.2355	1982	90.39086	162.6976	1982	93.253	177.6676	1982	84.88101	171.1277
1983	82.85526	168.0901	1983	90.18853	162.3334	1983	90.9415	173.2637	1983	81.00816	163.3197
1984	82.05223	166.4609	1984	85.92873	154.6661	1984	82.80115	157.7545	1984	81.02885	163.3614
1985	76.30916	154.8099	1985	85.23209	153.4122	1985	82.90996	157.9618	1985	73.10532	147.3869
1986	72.05904	146.1876	1986	81.64863	146.9622	1986	81.41323	155.1102	1986	71.49042	144.1311
1987	66.91679	135.7554	1987	73.81453	132.8613	1987	74.09044	141.1587	1987	66.82913	134.7335
1988	67.02789	135.9808	1988	73.97573	133.1514	1988	72.44845	138.0303	1988	64.77995	130.6022
1989	63.2419	128.3001	1989	69.34434	124.8153	1989	66.52813	126.7508	1989	64.19675	129.4264
1990	60.92563	123.601	1990	69.90953	125.8326	1990	65.57541	124.9357	1990	62.93019	126.8729
1991	60.38459	122.5034	1991	67.83538	122.0992	1991	64.85114	123.5558	1991	58.53338	118.0085
1992	57.57119	116.7958	1992	63.74106	114.7297	1992	60.96577	116.1533	1992	56.7405	114.3939
1993	56.15307	113.9188	1993	61.74775	111.1419	1993	60.53451	115.3316	1993	55.94812	112.7964
1994	54.99929	111.5781	1994	60.1328	108.2351	1994	57.59109	109.7238	1994	54.31535	109.5046
1995	53.25004	108.0294	1995	58.61526	105.5036	1995	58.30027	111.0749	1995	53.63333	108.1296
1996	53.47108	108.4778	1996	58.08509	104.5493	1996	53.77013	102.444	1996	51.7067	104.2453
1997	49.29218	100	1997	55.55758	100	1997	52.48734	100	1997	49.60097	100
1998	48.9202	99.24535	1998	54.11852	97.40978	1998	52.5777	100.1722	1998	50.15056	101.108
1999	48.88672	99.17744	1999	56.4942	101.6859	1999	54.66578	104.1504	1999	52.78435	106.418
2000	52.17043	105.8392	2000	58.1876	104.7339	2000	57.60904	109.758	2000	52.70459	106.2572
2001	53.71918	108.9811	2001	61.1292	110.0285	2001	58.91785	112.252

Updated using per-capita consumption and retail beef price data from the Livestock Marketing Information Center website (http://lmic1.co.nrcs.usda.gov/), updated on October 23, 2001.

The index calculation is based on demand-constant prices compared to 1980 using an elasticity of -0.67. The index was then rescaled to 1997=100 so that changes from 1997 can be easily monitored. A current index of 105 means demand has increased 5% since 1997; an index of 96 means demand has decreased 4% in the same time span. The index values show how demand is changing but give no information on why it is changing. The index values are also a function of the -0.67 retail level demand elasticity, but the index does not change drastically for elasticity parameters of -0.5 to -0.8.

The October retail price for Choice beef is now available. It was $3.38/lb., up slightly from the September price and up $0.26/lb. from October, 2000. Commercial production for Quarter 4 appears to be up about 2.5% from 2000. With the decline in beef exports beef this year and the continued strong movement of imports, we are likely to see an increase in per capita supplies for fourth quarter when all the data are in. That supply increase will mean an increase in per capita consumption. Since per capita consumption is actually calculated as a disappearance number, we are not likely to see any huge buildup in inventories. We are still dealing with expectations, but the price for beef during November and December will have to come down $0.25/lb. or more and move back down to $3.25/lb. or lower before any year-to-year decrease in beef demand for Quarter 4 can or will be documented.

Producers should not make their herd building and investment decisions around someone's negative comments about beef demand built on supply and do not recognize that you can only talk about demand when you look at price and quantity data at the consumer level. We know that cattle prices are down and that the box beef values are down as well, but those decreases do not prove anything about beef demand. What we have been seeing since late summer is a huge increase in the margins that the retailers are extracting from the consumers. It has to be the case: cattle and box prices are down significantly and retail prices are flat around $3.38/lb., only a few cents per pound below the record high prices we recorded earlier this year. The chart shows monthly retail prices for 2000 through October, 2001 and the 5-year average of retail prices. The patterns on the chart certainly do not look negative for beef, not when you recognize that we are projected to see an increase in production during Quarter 4 compared to last year.

The message on demand must be correct. After nearly 20 years of travel to all corners of the country talking about this important subject, I sat down and wrote "Primer on Beef Demand" in spring 1998 and sent it unsolicited to about 400 agencies, producer association leaders, packers, retailers, politicians, and analysts. It was run in many magazines the following year, and it might have had something to do with the turn in beef demand that we saw starting in 1998. Maybe it is time to go back and read that simple piece again. It is available on the Internet at www.aaec.vt.edu/rilp, or you can get in touch with me if you need a hard copy. I can be reached by email at purcell@vt.edu or by telephone at (540) 231-7725. I am seeing lots of writers, including some in research institutions that ought to know better, who are assuming that declines in beef demand are behind the recent break in the fed cattle market and the related decline in our yearling and calf prices. I do not see evidence of any decreases, at least not yet, and producers who are making tough investment decisions need to know the facts as they decide what to do. It has been many years, perhaps back into the 1960s and early 1970s, since both the demand side for beef and the supply-side cycle have been lined up and supportive of activity at the cow-calf level. Virginia producers will see a good price scenario for the next several years and should not let anybody's incorrect assertions or assumptions about the state of the world in beef demand block what you need to do.

Contact the author at purcell@vt.edu

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