Extension by John RittenWritten by John Ritten
By John Ritten, UW Extension Production Economist
One aspect of economic theory my undergraduate students seem to have a hard time following is the difference between demand and quantity demanded.
There is usually a lot of talk about beef demand, but relatively little about the quantity of beef demanded. We have recently seen a spike in consumer beef prices, which has some economists worried about demand, and others feeling just fine. The reason some people are worried about the spike in prices is that it may be signaling a change in demand for beef. The other camp is not worried because they view the spike as just a change in the quantity demanded due to recent restrictions in supply. I am somewhere in the middle of these two camps.
A change in quantity demanded is just that, a reduction in the quantity of beef sold, due strictly to an increase in price, caused recently by a decrease in supply. This is shown as a move from point ‘A’ to point ‘B’ in the graph. A change in demand would be a shift in the demand for beef at a given price, as noted by a change in the demand curve from D1 to D2 in the graph.
Shifts in demand are based on changes in consumer preferences and offer some cause for longer-term concern. If a shift in beef demand occurs, even after prices return to more “normal” levels in the retail sector, the industry will continue to experience a reduction in sales. Many people believe that what we are seeing at the moment is just a decrease in consumption based on the decrease in supply due to recent events. However, I am worried that a prolonged increase in beef prices may begin to shift demand away from beef, especially if consumers are getting more of their protein from sources other than beef.
The biggest reason for the increase in prices has been the fact that we have seen another reduction in national beef numbers. We now have the smallest total inventory since 1952, and last year experienced the smallest calf crop since 1950. Given the fact that Oklahoma saw a decrease of 288,000 beef cows and Texas saw a decline of 660,000 beef cows last year due to drought, there is no indication that national herd numbers will rebound this year.
The low calf numbers have pushed up feeder prices, and this increase, coupled with high corn prices, has pushed up slaughter prices. All of this has pushed up beef prices at the supermarket. Retail beef prices have been rising for over 22 consecutive months. As expected, consumers have responded by buying less beef. However, so far this is seen mainly as a decrease in quantity demanded (a move from ‘A’ to ‘B’), and not a major shift in demand (a move from ‘D1’ to ‘D2’).
However, the recession has had an impact. While the demand index for beef shows only a slight decrease in beef demand over the last few years, the index does not accurately track what products consumers are buying. There is some evidence that consumers are filling their baskets with ground beef, not steaks as they were prior to 2008.
So, is there anything to worry about? Maybe. Actual demand for beef is, in part, tied to substitute products. In this case, pork and poultry are the major substitutes for beef, and it appears as though there has not been a major challenge from pork. Pork prices saw record levels in 2011, and increased by roughly 10 percent over the previous year, the same increase seen in beef prices. However, poultry prices only saw an increase of around two percent last year.
While it is assumed that demand for beef is somewhat safe from competition with poultry, there is cause for some concern. It is widely expected that consumers prefer quality cuts of beef over poultry, however the recent economic downturn has many consumers turning to ground beef more often, and having steak only for special occasions. It is unknown if ground beef holds the same preferences over poultry as the higher quality beef cuts. If not, a prolonged period of high beef prices without a corresponding increase in poultry cost may impact consumer preferences, and could start a shift in actual demand (‘D1’ to ‘D2’) as opposed to just a decrease in quantity demanded.
Where does this leave us? In the long run, any shift away from beef will ultimately hurt producers at all levels of production. However, in the short run, there is no indication that cattle prices will decrease significantly. First, due to the high cattle and beef prices, there is a push to rebuild breeding stock, and the retention of additional heifers will cut supply even further in the short-term. Second, the export markets have been favorable to U.S. producers. Export data is available through November of last year, and in the first 11 months of last year the U.S. exported more beef than in any previous calendar year. During the same time, beef imports were down significantly. So, the increase in international demand and the continued decrease in overall supply will be favorable for prices this year.
However, I think we need to be cautious, and aware that prolonged high beef prices may ultimately chase away some customers as they find cheaper substitutes. The industry needs to be cautious, and make sure that we are, in fact, just moving along a demand curve as prices increase, and not decreasing overall beef demand in the long run.