With Declining Beef Demand,
Prices Not Likely To Improve

By Colleen Schreiber

DENVER — Mike Sands, vice president of Sparks Inc., painted a not-so-bright picture for beef producers attending the recent Cattlemen’s College here in conjunction with the summer National Cattlemen’s Beef Association meeting.

Sands focused on the economics of beef demand, the competitive environment for beef, where the industry is now, and where it may be headed in the future.

Whole meat production and therefore consumption, Sands told listeners, has been trending higher over time. In the mid 1980s total red meat consumption including beef, turkey, poultry and pork stood at 186 pounds. Since then, total meat consumption has increased at a rate of about one pound per person per year.

Today it averages about 206 pounds per person. Based on that same rate of increase, Sands said, 10 years down the road, experts predict consumption to reach 216 pounds per person.

That uptrend in total meat consumption, however, masks decisively different trends for the individual meats, Sands told listeners. Beef consumption, fueled mostly by an expanding foodservice industry, peaked in the mid-1970s when per capita beef disappearance hit a record of 94 pounds, up from around 75 pounds in mid-1960s. The cattle inventory during that period stood at 133 million head.

Since then, however, the picture has been rather bleak. Demand has continually fallen off. Even when the cattle inventory dropped below 96 million head in 1990, per capita disappearance continued to work lower, reaching about 65 pounds in 1993. Experts expect it to drop to around 61 to 62 pounds in the near future, Sands reported.

"The challenge to the beef industry is to halt the slide in beef demand that has plagued the industry for nearly 20 years," he told listeners. "Pressure from competing meats will not make this task any easier."

The economist warned against using demand and consumption interchangeably. "While total meat consumption has trended upward over time, it should not be concluded that demand is increasing."

During the early 1970s consumers appeared willing to pay more for progressively larger quantities of beef, suggesting an increase in demand. From 1979 to 1986, per capita consumption was generally stable in the 77 to 79 pound range, but retail prices plummeted, Sands noted. "Consumers were willing to take the same quantity of beef, only at progressively lower prices. In fact, it took 30 percent lower retail prices in 1986 to move about the same quantify of beef into consumption as in 1979 — a classic definition of declining demand," he told the crowd.

During the late 1980s, the industry was again reducing production and beef consumption declined with prices working slightly higher. But, as production and consumption stabilized in the early 1990s and began a modest increase, price levels ratcheted lower again. From 1991 to 1997 retail prices declined nearly 10 percent despite little change in per capita disappearance.

Consumption is equal to cold storage stocks, plus production, plus imports.

The single biggest factor affecting consumption, Sands noted, is production.

"If we change production, we’re going to affect consumption in any given year. ‘Sell it or smell it’ still applies."

The real issue is the price at which the industry can move the product through the system. U.S. cattlemen, he said, have the ability to determine in any one year how much beef is going to be consumed. The market determines the price line.

"If we increase production, consumption is going to go up, but we’re going to move that larger production through the marketing system by reducing price," he told listeners. "Unfortunately, in a declining demand scenario like the industry has been faced with for the last two decades, even if production shrinks, consumers continue to pay less for the product. That suggests that if we want to maintain price at our original level, the size of the industry is going to shrink.

"And in a declining demand scenario," he explained, "we as an industry are left with the problem of cutting production fast enough to support price."

Sands cited several key factors affecting demand. They included: consumer income; price and availability of other substitutes; consumers’ tastes and preferences; population; and exports.

He discussed the situation with competing meats. Pork production, he noted, has been trending higher. The current output of 18.3 million pounds, a record large output, has had on impact on hog prices and pork prices at the retail level, as well as beef prices.

"When a retailer can step forward and feature center cut boneless pork loins at $1.99, I guarantee it is going to compete quite well with beef. Pork is simply going to have a negative impact for a time period on the demand for beef," he warned listeners.

Demand for pork declined in the late 1970s and early 1980s, and though the situation hasn’t improved much for pork since then, demand for pork is still better than that for beef.

Under a stable demand relationship with pork during 1996-97, Sands said, beef prices would have been near 1.3 to 1.5 times the price of pork, as in 1988-91. However, to move the same relative quantity of beef in 1997 as in 1988-91, beef prices had to decline to 1.2 times the pork price.

"As indicated by the relative decline in beef’s price compared to relative changes in consumption, the consumer’s preference for beef has declined in relation to pork," he noted.

A similar case can be argued for beef relative to chicken. Compared to the early 1990s, beef prices have declined in relation to broilers, while at the same time beef consumption has declined relative to broilers. Although beef prices rose in relation to broilers during the late 1970s and early 1990s, the price rise was due primarily to smaller beef supplies – shrinking from more than 1.5 times as large to about the same in 1992, he said. Since the early 1990s, beef prices slipped from about 3.3 times the broiler price to about 2.8 times, while relative beef production held about steady at near .95 times as large as broiler output.

"This beef/broiler relationship is similar to the change in beef/pork — consumers’ preference for beef has declined in relation to chicken, forcing beef prices to decline more than might typically be suggested by production changes," Sands remarked.

In terms of per capita consumption, Sands told listeners, poultry consumption has flattened out in recent years even though production continues to move higher.

"One thing the broiler industry has been able to do is increase exports rapidly enough so that domestic consumption in some respects has flattened out."

Increasing beef exports, he noted, will help shrink available supply domestically, but it does not affect domestic demand.

Sands told listeners that some products of the beef carcass are performing better than others. Demand for the middle meats, the higher-valued rib and loin cuts, is thought to be increasing, at least through some outlets like foodservice and export channels.

In contrast, the price ratio of the ends meats, the lower-valued chuck and round cuts, has trended lower. As with most beef cuts, strong seasonal component is evident, but over time these cuts are declining in value relative to the carcass as indicated by the declining price ratio. These cuts represent a relatively large proportion of the carcass, and for the most part are merchandised through traditional retail channels, which helps explain the conventional conclusion that beef demand is declining.

Ground beef represents another significant portion of total beef demand, accounting for nearly half of total beef consumption. Sands said prices for 81 percent lean coarse ground beef have declined in relation to the cutout value during the mid 1990s. Most of the decline in price for coarse ground beef, however, is likely due to larger supplies, not declining demand.
Increased cow slaughter the past couple of years has boosted cow beef production, the main ingredient in ground beef production, to the highest levels in a decade. He noted, too, that the steady flow of E. coli recalls and outbreaks during the past year have had a decidedly negative impact on ground beef and trimmings prices.

Sands concluded by relating how this declining demand has impacted fed cattle prices over the last couple of decades.

"Had beef demand not declined since the early 1990s, we would be looking at cattle prices that would average fairly close to $80," he said.

The economist told listeners that under a declining demand scenario, simply being more efficient is not going to be enough to make the necessary changes for the beef industry. Consumers, he stressed, continue to demand more convenience, more consistency and higher average quality.

"Act now," Sands advised. "The next two to three years are crucial. Cattle numbers likely will tighten sufficiently to support prices, despite continued erosion in beef demand. Changes will be easier to make under this stronger price structure. However, as production begins to rise again, both larger supplies and declining demand will weigh on prices unless changes are implemented soon."