Kub’s Den: Elastic beef | TSLN.com

Kub’s Den: Elastic beef

Elaine Kub
DTN Analyst

TSLN file photoWhile beef is not exactly a luxury, it is less of a staple than rice or wheat.

Everyone got a little thrill, I assume, the first time they drove past a gas station and saw the first number of the price per gallon was a two, rather than a three. For me, my joy was increased by the fact that I had just won a bet: a friend of mine had put a steak dinner on the line, thinking gas would never go under $3.00 again. Ha!

Most of the truly great steak dinners I’ve had were the result of similar bets because I can’t bring myself to drop $30 or more on an entree for just any old reason. I see the porcini-dusted beef tenderloin (grilled with wild mushroom and heirloom potato saute and drizzled with marsala syrup) at the restaurant I’ve picked out for this payoff is listed on the menu at $37. I’d say my friend is getting off easy; I was going to demand Kobe beef.

My point is that such food items are a luxury, which is a little weird to think about, considering that I was recently out checking my parents’ crop of fall calves. They are anything but “elitist” creatures, with their big brown eyes and simple tastes for grass, milk and sunshine-coated hills.

That a steak is a luxury is also not an idea that beef producers want at the forefront of consumers’ consciousness right now, as we could be entering a long and painful recession, or even just a short, breath-taking one. They want beef to be on even footing with chicken, pork, Cheerios and anything else a shopper could go to the grocery store to pick up — even if that consumer is shopping with an unemployment check or trying to figure out how to save up and pay for their child’s college education after losing half their intended savings in the stock market.

But is beef on even footing? Is pork? Is soda pop (another product, like beef and pork, which is derived from corn)?

As it happens, no. If the only two words we had to describe goods, even dietary requirements like carbohydrates and proteins, were “necessity” and “luxury,” then beef is decidedly more “luxurious” than staple grains like rice and wheat. Half of the world’s population eats rice daily, and without it, they would starve. They will eat rice regardless of price, although obviously governments do what they can to keep rice affordable. When they don’t, riots occur (witness Egypt and the Philippines earlier this year). Those same consumers would only buy beef if they have disposable income, which they did in growing numbers during the past years of economic expansion.

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In an example from the U.S., someone struggling to stay solvent will gladly buy a 10-cent pack of ramen noodles or box of macaroni and cheese. Ask him to spring $3 for a pound of ground beef, however, and his wallet may close back up.

There is an economic measurement, the coefficient of elasticity, which demonstrates this phenomenon mathematically. Regular Kub’s Den readers may already be familiar with this. Basically, elasticity is equal to the percent change in quantity demanded, divided by the percent change in price. It indicates how sensitive demand is to price fluctuations. Something perfectly elastic would have an infinitely large coefficient, meaning that any increase in price would negate all demand. Something perfectly inelastic would have a coefficient equal to zero, meaning that no matter how the price went up, the quantity demanded would never change. Neither is realistic. However, here are some examples of various goods and their elasticities:

Rice = 0.1 to 0.2 (it’s basically a must-have)

Wheat = 0.3 to 0.5

Pork = 0.2 to 0.3 (a common source of protein in the developing world)

Corn = 0.3 to 0.7

Beef = 0.5 to 0.8 (depending on the cut)

Soybeans = 0.7 to 0.9

Gasoline = 0.5 to 1.5

Medical insurance = about 2 (People are willing to gamble and do without if it costs too much.)

Those numbers were pulled from an assortment of different Internet sources, so they may be out-of-date or slightly off in comparison to each other. But the fact remains that consumers will be relatively more willing to forego steak than cereal in the event of a recession. Anticipation of that has already been showing up on the cash markets for livestock. Prices for lean hogs have dropped about six percent over the past week, but since livestock traders believe pork demand holds up better in a recession than beef demand does (consistent with the coefficients), some values have dropped even more dramatically in the beef cutout market.

I’m not saying that consumers should cut back on their beef consumption when economic times get tough, or that it is necessarily fair for them to do so. The beef industry would be quick to point out all the wonderful lean cuts of lean beef that, pound for pound, offer superior nutrition (protein, B12, iron, etc.) when compared to other meats (or tofu). But that may or may not be in grocery shoppers’ consciousness right now, and it’s possible they’ll revert to old patterns of cutting back on beef when their incomes get stretched. It’s a factor we should keep in mind.

Whenever an item’s demand changes at about the same rate as its price, i.e. its coefficient of elasticity is about 1.0, that product is considered a luxury. So by that standard, beef is not exactly a luxury, but my porcini-dusted tenderloin probably is.

elaine kub can be reached at elaine.kub@dtn.com