Tonsor emphasizes beef demand
“Given relative certainty on tight supply, the key driver of realized prices in the industry in 2014 will be how strong beef demand is on the national level,” Kansas State University Livestock Economist Glynn Tonsor commented during a Feb. 11 webinar. “Demand is always key, but it is extra key when we have uncertainty around supply.”
Tonsor noted that demand reflects how much consumers value beef, and, ultimately, tells the industry how much money is available.
“Dr. Wayne Purcell of Virginia Tech said, ‘To fix it, we have to understand it,’” Tonsor commented.
When Purcell made the statement regarding demand, Tonsor said the industry was seeing several decades of beef demand problems.
“Everyone needs to pause and understand the basics of beef demand before we can make rational strategic moves around the issue,” he said.
Beginning by looking at the relationship between price and per capita consumption, Tonsor explained that in 1989, Americans were consuming 69 pounds of beef per capita and the all-fresh beef price was $3.80. In 2013, consumption dropped to 56 pound per capita while the all-fresh beef price increased to $4.60.
“Economists tend to do a demand line to describe the trade-off between increasing price and quantity changes,” he said. “As we ask consumers to pay more, how much do they pull away and how much are they interested in purchasing?”
For example, from 2011-12, Tonsor commented that a slight increase in pounds per capita, or pounds available, was realized, yet the inflation-adjusted price went up.
“By definition, beef demand had to improve for that to occur,” he said. “If it did not and we had the same amount offered, if not more, we would expect price to come down slightly. That is not what occurred.”
In 2012, beef demand was 3.6 percent stronger than in 2011, he commented.
On the other hand, Tonsor compared that increase in 2012 to the situation in 2008-09.
“Moving from 2008-09, there was a reduction in pound per capita, and the inflation adjusted price went down,” he noted.
The result was a five percent decline in demand. If demand remained flat, price would have increased.
“When we talk about demand change over time, we see prices adjust to clear the market,” Tonsor said. “What we produce gets consumed. Long-term, what we produce is a function of demand, but year over year, we know what we produce, and for the most part, that is consumed.”
The major question, he added, is the relationship between the amount of product offered and the point in time that price clears the market.
The beef demand index provides an indicator for demand.
“The index compares all years relative to the base year of 1980,” he said. “In 2010, the index takes on a value of 50. That means that if demand was as strong in 2010 as in 1980, we would have twice as high retail beef price, once adjusted for inflation.”
However, lower beef prices resulted, after inflation, because demand fell.
“The demand index tell us how much demand erodes or improves year-over-year,” Tonsor said.
“The very positive story is that in 2013 demand was up three percent,” Tonsor remarked. “That is the largest increase since the 2004 boom, and it is a very positive thing.”
Additionally, 2012 increased over 2011.
“If we look more narrowly at the individual quarters in the all-fresh demand series, the fourth quarter of 2012 was up almost two percent,” he said. “That was the 14th quarter in a row with a year-over-year increase.”
The continued increases tell a consistently positive story.
Moving to the fourth quarter of 2013, Tonsor explained that per capita consumption decreased by 1.4 percent and the inflation-adjusted beef price increased 3.6 percent. The price of beef was $5.01 per pound.
“This is what underlies the positive 1.8 percent increase in demand,” he said.
“If prices would have increased 1.7 percent, I would say we had no demand change. We expect prices to go up if we have less consumed and flat demand,” Tonsor continued. “The fact prices increased by more than that tells me that demand increased.”
Further, the 3.6 percent increase in prices means that demand increased notably in the last quarter of 2013 over the previous year.
“Understanding how those price relationships compare to per capita availability consumption change over time is critical,” Tonsor emphasized. “It is going to be critical in 2014-15 because we are going to set low per capita consumption numbers.”
At the same time in 2014-15, consumers will be expected to pay historic high beef prices, and the industry will achieve historically high beef prices for the beef in the cattle price series to be realized, he said.
“I’m optimistic of that occurring,” Tonsor commented.