Extension Education: How Will Demand Hold Up?
There has been a lot of talk recently about the severe restrictions in beef supply this year, and the expectations of further decreases into the next two years as well. As most of us have seen, the current restriction in supply has caused a rather significant increase in retail prices. January prices hit a record high. Regardless of the increased prices, the current reduction in supply practically ensures that Americans will consume less beef per capita than in most recent years; the fact is, there isn’t enough beef to go around.
However, the increased prices will also limit domestic consumption in the coming years. The jump in retail prices is beginning to worry some people in the industry. However, just because consumption decreases as prices increases, there isn’t necessarily cause to worry that demand for beef has been hurt. In fact, demand isn’t simply a measure of consumption, it is the relationship between price and consumption, and economic theory tells us that for a given demand level, we fully expect consumption to decrease as retail prices rise. However, the next few years could be stressful on domestic beef demand.
Look at demand
To start, lets explain what demand really is. John Riley, an economist at Mississippi State, recently wrote a few things that demand isn’t. He states, rightfully, that demand is not simply a measure of consumption, the amount of consumption of beef as relative to other protein sources, or the percent of disposable income that a person devotes to beef, although a lot of people tend to look at these numbers when describing beef demand.
So what is demand? Most textbooks define demand along the lines of, “the relationship between a quantity consumed and the price of a good, as everything else is constant.”
The last part of that definition is the tricky part, especially in current times. So, usually if the quantity demanded changes, as price is constant, we can assume the demand – or the relationship between price and quantity – has changed. However it is getting increasingly difficult to determine if consumption patterns are changing due to changes in demand, or other factors.
So what can actually shift demand? Income has a big role in demand, although percent of income spent on a specific good isn’t really a good indicator of demand. Prices of related goods, consumer preferences and expectations also play a role in demand. All of these factors may, in fact, shift beef demand in the coming years. We have already seen a drop in disposable income as the payroll tax cut was recently allowed to expire. Also, consumers are very wary of what Congress will do next, and this pressure on consumer confidence is likely to hurt demand for many products, including beef.
It also appears as though the direct competition for beef, in terms of pork and poultry, will see less drastic increases in retail prices in the coming years. All of this may be troubling for long-term beef demand.
While I doubt we will see a drop in consumption similar to what has happened in lamb over the last 50 years, we may begin to see consumers shift to other meats. Even as the beef demand index has gained over the last few years to near levels seen prior to 2008, the expected increase in prices will almost inevitably push consumers to either lesser quality cuts and/or ground beef, or more likely cause substitution towards pork and poultry. We have already seen a drastic reduction in consumption of steaks, which is more often now seen as a special occasion dinner, not a regular part of household consumption.
As Americans have begun to consume meats other than beef with more frequency, I worry that we may see a long-term change in consumer preferences. I doubt chicken or pork will push beef off the table entirely, but the longer our customers are consuming these substitutes due to the relative high price of beef, the more likely these consumers are to continue to purchase these items when beef prices fall.
Some would argue that beef has always been more expensive than pork or poultry, and the industry has done just fine, and I can’t argue that fact. However, given the even higher premium of beef as opposed to other meats in the coming years, we need to make sure we don’t lose any domestic customers.
As Darrell Peel, an economist at Oklahoma State, recently said, beef doesn’t need to be the cheapest meat in the market, but it does need to provide a better value in order to ensure beef demand remains strong in the coming years. One way to ensure that is to continue to provide high quality beef as the industry has done for years. So, while cattle prices are expected to remain strong in the coming years, remember that those higher prices often carry through to the retail market.
In the short-term, high cattle prices are good for Wyoming producers, but only as long as we don’t run off too many customers in the long-term. As an industry, we really need to focus on providing a high-quality product in the coming years to make sure our customers keep coming back.