| OU 350 | October 14, 1999 |
THE IRREVERSIBLE
DEMAND FOR BEEF?
P.J. Rathwell,
Extension Ag. Economist
Years ago, in graduate school, Professor John Goodwin wrote an article entitled "The Irreversible Demand for Beef." Based upon the economic conditions affecting the cattle industry in the 1960s and 70s it was Dr. Goodwin's contention that the demand for beef would never decline.
Consumers were developing a taste for marbled beef. Demand increased, and profit potential pulled new investors and their dollars into the cattle industry. But, Dr. Goodwin did not count on consumer attitudes toward beef changing. Consumer tastes and preferences and the "beef product" have changed since the end of the 1970s. Consumers have purchased ever-increasing supplies of pork and poultry while beef's share of the retail counter continues to decline.
Figure 1 clearly shows that consumer expenditures on beef has declined over the last twenty years. Pork's share has increased slightly. But the majority of beef's lost market share has gone to poultry. Efficiently produced consistent and uniform poultry products plus the "cholesterol scare" effectively replaced beef in the consumer's market basket.
To most cattle producers the concept of per-capita consumption is equated to the demand for beef. If per capita consumption rises then beef demand must be increasing. Nothing is further from the truth. Per capita consumption measures the "supply of cattle". It is a measure of the amount of beef available to the consuming public divided by the population level. This is not a demand measure.
But, per-capita consumption is a good way to explain the relationship between the three major competing meats. This relationship is referred to as "market share," the amount of the market controlled by a particular meat group. The graphs in Figure 2 show the per-capita consumption of beef pork and chicken from 1960 to 1998. It is apparent that the per-capita consumption of beef rose during most of the 1970's and has since declined. Pork per-capita consumption has remained relatively constant throughout the period. The per-capita consumption of chicken has shown a steady increase across the time period starting at about 20 pounds to 80 pounds per-capita (measured in ready-to-cook weights). Hence, per-capita consumption does tell us that the amount of beef consumed by the public has declined relative to pork and chicken. It does not tell us why it has declined. This is a "demand question".
The demand for beef is a measure of the relationship between the quantities consumers will take at various prices. This is an inverse relationship. In order to get the marketplace to take a larger quantity of beef the price of beef must fall unless the "demand for beef" increases. Demand has not increased just because the consumer has purchased more beef at lower prices.
Most cattle producers will argue with this point. They will say that the quantity of beef moved through the market increased because the price was reduced. This is not an increase in demand. An example might explain this point. Think about the last time you went into a store to buy a pair of shoes. You intended to buy one pair, but when got to the store, they were having a "50-percent off sale." Did you leave the store with two pairs of shoes? If you did, you bought the shoes because the price was reduced. Your demand for shoes did not change when you bought two pairs. You took a bigger quantity because the price was reduced. The quantity demanded, "not demand", was different at the lower price. Your attitude toward those shoes, the amount of money in your pocket or the things that determine your willingness to pay and to consume---DID NOT CHANGE.
What causes a change in demand? A change in the demand for beef comes from basically three factors: a change in consumer income levels, changes in the prices of substitute products (pork and poultry) and changes in consumer tastes and preferences.
Changing Income Levels
Generally, people will purchase more beef when their income levels increase - especially steak. Research has consistently shown that this relationship holds true. Per-capita incomes in the U.S. have been going up for many years. This alone should cause the demand for beef to increase. But, Figure 3 shows just the opposite comparing the per capita consumption of beef and personal income for US consumers from 1960-1998. Per capita consumption of beef declined over this time period as disposable income increased.
Changing Prices of Substitute Products
It should be troubling to cattle producers when disposable income levels are increasing and beef consumption is not. Something else must be exerting significant influence on beef demand. Changing prices of substitute meats also has the potential to affect the demand for beef. The rapid expansion in the pork industry has driven pork prices to below $25 per cwt. Pork prices to consumers have also declined. When retail prices of pork products are significantly lower, beef demand declines due to the consumer shifting their purchases from beef to pork.
Changes in Consumer Tastes and Preferences
This is the "demand changer" in the beef industry. The impact of changing tastes and preferences is obvious. You will buy more of a product if your preference for this product is increasing. Changes in consumer tastes and preferences have been the long-term factor affecting beef demand for the last twenty plus years. Consumers through their dollars spent at the grocery store have told the beef industry that they do not like the fresh beef that we are offering. Concerns about cholesterol and fat, inconsistent quality, and lack of convenience in preparation have turned the consumer's "preference" away from beef.
Over fifty percent of the beef we eat in the U.S. is consumed as ground beef. This is a strong market for beef. However, ground beef does not command a high price. Steaks, on the other hand, are a favored cut that does command a high price. But, the steer is limited in his production potential of stakes. Only about 20 percent of the live animal will typically go into steaks. What's left ground beef at bargain basement prices or roasts?
When was the last time you bought a chuck roast? Higher income families with two working adults don't have two to four hours to cook this roast. Their on-the-go lifestyles mandate something quick and easy---like boneless chicken breast. But, this part of the steer is only offered as a roast or ground beef. We are not converting the chuck (or the round) to product forms the modern consumer wants-----the chicken people did--nuggets, chicken strips, smoked luncheon meats, buffalo wings, etc.
Dr. Wayne Purcell, professor of Agricultural & Applied Economics at Virginia Tech, research indicates that the modern consumer wants:
1. Low-fat and low-cholesterol products;
2. High quality products that offer a favorable eating experience;
3. Products that offer that positive eating experience consistently and reliably; and,
4. Products and product forms that are convenient and easy to prepare.
How can the beef producer respond to these consumer demands? The producer's typical response is to "breed" these changes into his beef herd. Purcell suggests that before we buy into "changing genetics" as a proposed solution for the industry, something needs to be done about changing the offering of fresh beef. Genetic solution take time, and there is no reason to wait (Note: the longer it takes, the greater the risks of market share lost to pork and poultry).
The beef industry needs to continue their investment in product development. Research dollars have developed "consumer oriented" products that emphasize convenience, taste and uniformity. This research hasn't forgotten the "away-from home market" either.
Summary
Cattle producers must recognize what is affecting the demand for beef. This is the starting point to developing the "fix." Product development research allowed the poultry industries to capture market shares. Chicken products were designed to capture changing consumer lifestyles and preferences. Current research efforts by the beef industry will help us position new beef products to more favorably compete with pork and poultry products. Things are starting to change - for the better.
Outlook
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