Basics of beef demand
By: James Mitchell, Andrew McKenzie and John Anderson
Price determination is the process by which fundamental supply and demand conditions interact to determine the market price level. Meaning, it takes supply and demand to determine the price of a good. These concepts hold for cattle and meat prices.
Because of this, we pay close attention to consumer demand for meat. In the beef supply chain, U.S. consumers are the primary demand. Factors that impact consumer demand will affect meat and cattle prices. The purpose of this article is to review some of the factors impacting U.S. beef demand in 2022.
Price-quantity relationship Demand is a price-quantity relationship, holding all other factors constant. It is the quantities that a consumer is willing and able to buy as prices change. As prices increase, the quantities that consumers are willing to purchase decrease. We refer to this as the law of demand. Thus, the downward sloping demand curve that we are all familiar with from our Econ 101 course.
When market analysts study beef demand, they often think about two questions. What is the slope of the beef demand curve? And what factors shift the beef demand curve? The former relates to quantity demand for beef, while the latter refers to beef demand. For many, the difference between the two concepts is simply an abuse of terminology. But, to economists, there is a significant difference.
Very few topics have been discussed as heavily as meat price inflation. The causes of meat price inflation go back to the COVID-19 pandemic.
During the pandemic, two causes of inflation occurred simultaneously. The first is cost-push inflation. Processing plant shutdowns, labor shortages and supply chain logistics all pushed meat prices higher. At the same time, we had demand-pull inflation, where more consumer dollars are chasing fewer goods. Both causes persist in 2022.
Meat prices in 2022 are setting records. In April 2022, retail beef prices averaged $7.37/lb, or 14% higher year over year (Figure 1). A concern that we often hear is that these record beef prices will hurt beef demand. The concern is valid, but the logic isn’t. Higher beef prices will decrease quantity demand for beef, not beef demand. This is not necessarily a bad thing.
What matters is the slope of the beef demand curve (steep or gradual decline in quantity demand) and total beef expenditures (Figure 2). The economic term is the own-price elasticity of demand.
By how much will quantity demand for beef decrease when beef prices increase? Research finds that the percentage decrease in quantity demand for beef is smaller than the percentage increase in beef price (Tonsor, Lusk and Schroeder, 2018). In more technical terms, beef demand is inelastic.
In other words, U.S. consumers are less sensitive to higher beef prices than they are to higher prices for some other foods – like cereal. In fact, the same research finds that beef demand has become significantly less price-sensitive over time.
Seasonality Peak beef demand occurs during the grilling season between Memorial Day and Labor Day. Seasonal changes in consumer demand for beef result in seasonal variability in retail beef prices. Figure 1 shows that the 2016-2020 average retail beef prices peak between May and June, when conditions are ideal for outdoor grilling.
Admittedly, during times of high meat price inflation, it is hard to disentangle seasonal effects from trends in nominal prices. In 2022, it will be hard to conclude that higher meat prices this summer result from strong meat demand.
However, a decline in meat prices this summer might suggest a decrease in beef demand. Retail beef prices, summarized by USDA-ERS, will offer several important insights into 2022 beef demand.
Complements and substitutes The prices of complements and substitutes will affect beef demand. The two main competing proteins for beef are pork and poultry. Pork and poultry prices are also reaching record highs this year. In April 2022, retail pork and poultry prices averaged 13% and 19% higher year over year. The overall price level of meat prices is irrelevant to beef demand. What matters is relative meat prices. That is, the price of beef relative to the price of pork and poultry (Figure 3).
If the relative price of beef increases, consumers will substitute beef for other proteins, all else constant. Throughout the pandemic, the price relationship between beef and pork has remained relatively stable. Beef prices are, on average, 1.5 times the price of retail pork.
The beef-chicken price relationship has recently declined in 2022, but beef remains more than three times as expensive as chicken. The decline reflects several factors, including outbreaks of highly pathogenic avian influenza (HPAI), which removed some birds from the supply chain and pushed up chicken prices. Beef remains competitive in 2022.
Income Inflation has important implications for consumer income and meat demand. The data shows that real wage growth has not kept pace with inflation in 2022. We also know that beef demand has become more sensitive to changes in consumer income (Tonsor, Lusk and Schroeder, 2018).
The biggest concern for beef demand in 2022 is the effects of inflation on consumer income and spending. However, it will take time to realize the effects of government policy on inflation.
Tastes and preferences While the price of substitutes like poultry, pork and plant-based alternatives is important for beef demand, many non-price factors are equally important. In 2020, K-State’s Meat Demand Monitor (MDM) started tracking consumer tastes and preferences for meat. Each month, MDM surveys U.S. consumers and asks them to rank the factors that are most important to them when purchasing protein.
Survey findings from MDM consistently show that taste, freshness, safety and price are the top four factors for consumers when purchasing protein (MDM, April 2022). Nutrition and health are also important factors impacting consumer purchasing decisions. Beef demand prospects remain positive as long as the industry aligns itself with consumer preferences.
Conclusion and outlook The U.S. beef cattle supply chain is the most complex system of markets that exist in agriculture. When beef and cattle prices change, dissecting the causes can be overwhelming. Many factors affect beef and cattle prices. As economists, we like to focus on one factor and assume that everything else remains constant. Of course, cattle producers operate in a dynamic environment where everything is changing simultaneously.
Still, it is helpful to segment the industry and examine the factors impacting each segment in isolation. If we want to understand beef and cattle demand, the best place to start is by examining the factors influencing U.S. consumers.
Inflation will affect consumer spending in 2022. The extent to which beef demand is impacted will depend on a number of factors. Consumer income, prices of complements and substitutes, and taste and preferences will all play a role this year. However, beef remains competitive relative to other meat proteins and we are not ready to conclude that 2022 will be a bad year for U.S. beef demand.
James Mitchell, Andrew McKenzie and John Anderson are agricultural economists with the University of Arkansas.
