Ever-Rising Beef Prices To Test Consumer Demand in 2014

Ever-Rising Beef Prices To Test Consumer Demand in 2014

Future beef demand depends on consumer reactions to higher prices during herd rebuilding.

Herd rebuilding and the resulting decline in beef production has plenty of folks asking whether beef will "price itself out of the market."

The answer is that beef demand is so complex it is hard to say, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.

Future beef demand depends on consumer reactions to higher prices during herd rebuilding.

"While there is concern that consumers will buy less beef with higher prices, it is important to keep in mind that there will be less beef on the market and thus a need to ration beef," Peel says. "The economic principle of demand is based on the concept that when a smaller quantity is available, higher prices will ration beef to those consumers who are most willing and able to purchase beef. In general, the idea that higher prices will restrict consumption of beef is precisely what will be needed to balance supply and demand in the coming months."

Yet it's important to remember that beef demand is complex and the beef market is a conglomeration of several distinct but related beef products, Peel says.

Certainly in the protein markets consumers have always shown a willingness to substitute higher-priced proteins, such as many beef products, for lower-priced protein products.

Peel adds that the current beef market situation and price structure is unprecedented and therefore has no previous model to compare with. He says that makes it very difficult to know exactly how consumers will adjust their purchasing of beef with other proteins.

By comparison

However, a 2013 beef demand study by Kansas State University and Perdue economists, commissioned by the Beef Checkoff, shows consumers have actually been pretty tolerant of high beef prices. Those economists say consumers recently increased their demand for beef at the same time the per capita consumption was declining.

"It is entirely possible for per capita consumption to decline and beef demand to increase.  In fact, this is what the industry experienced the past two years," wrote Glynn Tonsor, Ted Schroeder and James Mintert.

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"That is, per capita beef consumption fell in 2011 and 2012 relative to prior year volumes. However,  the annual retail beef demand index, which measures the vertical outward shift in demand in percentage terms, increased both years. During 2011 and 2012 retail beef prices increased by more than estimated beef quantity-price demand elasticities would have predicted given the reduction in available supplies signaling that beef demand increased."

Peel thinks beef quality will be "paramount" in beef markets at record prices, especially for middle meats. He adds that the recent increase in Choice grading percentage, due partially to reduced use of beta agonists, may be particularly timely in improving the quality mix of a limited beef supply.

Beef demand in 2014 depends on a variety of factors in the domestic and international market. One is macroeconomic growth in the US and resulting improvement in consumer incomes. Factored into consumer attitudes and spending are things that directly impact consumer discretionary spending, such as gasoline prices. These also have an immediate impact on beef demand.

The competition

Competing meat proteins look to be tough competitors as beef pushes to higher prices, Peels says. Both pork and poultry production are expected to increase in 2014, which would provide more supply at lower prices.

Peel notes that pork production is expected to increase roughly 2.5% year over year and if PEDv is controlled then a bigger jump in production could occur in 2014. Continued growth in pork exports may relieve much of the pressure on domestic markets, limiting U.S. pork consumption to a less than 1% increase.

He adds that broiler industry product is expected to increase nearly 4% in 2014. Again, expanded broiler exports may take a large percentage of the increase off-shore but US broiler consumption should increase roughly 2.5% next year.

Peel also says: "Wholesale broiler product prices increased in the middle of 2013 but wholesale prices for breasts, wings and legs have dropped sharply recently, suggesting the broiler market is not getting as much demand support as expected from higher beef prices."

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Peel thinks international trade of beef products will also play a critical role in beef demand in 2014 and beyond. Exports represent a significant component of total beef demand, plus imports and exports of beef help the market to adjust the mix of products in the domestic beef market. In turn, that improves total value potential.

Determining the mix

"Beef is perishable and what is produced will be consumed," Peel says.

He says this means less-preferred products will substitute for more-preferred products in the domestic market, but the result is less total value for the industry. Exporting beef products which have lesser demand in the US effectively expands the domestic market size and allows the industry to offer a higher-value mix of products to domestic consumers.

In February 2013 the USDA released a range of agricultural projections stretching out to 2022. Those projections included US per capita beef consumption falling until 2015. After that USDA projects increases, following with national beef cow herd expansion.

If per capita consumption falls during the 2013-2015 period as USDA predicted, the ability of beef demand to continue the year-over-year gains it experienced in 2011 and 2012 consumers will have to keep buying beef at ever-higher prices. Put another way, if demand grows while the quantities of available beef decline, retail beef prices will have to realize significant increases, say Tonsor, Schroeder and Mintert.

TAGS: Regulatory
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