Understanding beef demand
Beef demand is an often misunderstood concept; it is somewhat nebulas. It is also a key component of the market and therefore worth trying to understand. Perhaps one of the best methods to explain beef demand is to explain what it is not.
Perhaps you have heard a market reporter over the radio make a comment such as: beef demand was excellent this week as prices were sharply higher. This statement may or may not be true. How much beef was supplied to the market? If relatively little beef was supplied, then the higher prices may have been entirely due to the limited supply and beef demand may have been unchanged.
The same reporter may have said on another occasion that beef demand was strong this week as a large quantity of beef was sold in the marketplace. Again, this statement may be true or false. At what price did that large quantity move? If prices were reduced, then demand may have been unchanged. However, if price had remained the same, then it is likely that demand was in fact stronger. Therefore, to properly describe beef demand, you must know both the price of beef and the quantity of beef in the market place.
Each consumer has some demand for beef. There is some price that is high enough that no beef will be purchased. This price will vary for each consumer. As the price of beef declines, most consumer consumption of beef will increase. However, there is also some limit as to how much beef a consumer will eat, even if it were free. This quantity will also vary by individual. So in general, as the price of beef declines we expect consumers to eat more beef and as the price increases we expect them to eat less. But this does not constitute stronger or weaker demand. Demand can remain constant and consumers will eat more or less depending upon the price. Economists call this a change in quantity demanded, but this is not a change in demand.
So what factors can change demand? One factor that is certainly relevant at the present time is the strength of the overall economy. When the economy is strong and consumers have more disposable income they are more likely to buy more beef even if the price for beef is constant or increasing. This would be an increase in demand for beef. However, if the economy is weak, or if the expectations are that it will be weak in the future, then consumers may reduce their spending and buy less beef even if the price of beef may be lower. This would be evidence of a decrease in demand. Another factor is the price of substitute protein meats, for example poultry and pork. If prices for pork and poultry are declining, then consumers may choose to purchase more of those products and less beef. So, if beef prices are constant and consumers buy less beef that is a reduction in demand for beef. Sometimes prices and income are constant in the economy and we still observe changes in demand. This occurs over time as consumers tastes and preferences change. For example, a few years ago with the popularity of the high protein diets, beef demand increased as consumers chose to eat more beef and less carbohydrates in their diet.
Another factor that confounds our understanding of beef demand is there is not really one beef product but many beef products. Consumers don’t go to the restaurant or the retail case and order beef. They order a steak; and not just any steak but a ribeye or a round steak. Or they ask for ribs, or perhaps a pot roast or a prime rib roast. Most often they actually purchase ground beef in its many forms – hamburger, taco meat, meatballs, etc. Sometimes as prices change in the market place or as incomes or expected incomes of consumers change they don’t change how much total beef they eat but they do change what specific beef products they do eat. For example, in the current recessed economy, high priced beef steaks are not selling well. Demand for them has declined. However, demand for hamburger and thinly sliced roast cuts and even lower prices steak cuts have actually increased.
What does all this have to do with the price of fed cattle or the prices of calves? The short answer is it has a major impact on calf and fed cattle prices.
Let me briefly talk about the other side of the market, the supply side. Based on the recently released USDA Cattle Inventory report that showed the number of beef cattle on Jan. 1, 2009 was down two percent from the prior year and the last several months – cattle on feed reports that have shown declining placements and declining numbers of cattle on feed – one would expect that we would be enjoying very favorable cattle and calf prices. We are not. The main reason we are not is beef demand. The general price level in the marketplace is determined by both supply and demand forces. While declining supplies would lead to higher prices if beef demand were stable, beef demand has not been stable.
Beef demand decreased about 3.5 percent this last year relative to the prior year. On a quarterly basis, beef demand was down about one percent in the first quarter, down about 3.5 percent through the middle of the year, and down over five percent in the fourth quarter. Looking forward, because of continued problems in the general economy, beef demand is not expected to strengthen and will likely decline, at least in the first half of the year relative to the first half of 2008. Not only has beef demand decreased in total, but consumers are trading away from high priced beef products – steaks – to lower priced beef products – ground beef. This means that a fed steer is worth less money based on the ability to sell the beef. Furthermore, fed cattle also have hides and other products that for the most part are exported. That demand has also dropped significantly as the dollar has increased in value and as other country’s economies are also struggling.
That is why we have seen much lower fed cattle prices in the fourth quarter of 2008 and for the first six weeks of 2009. Lower fed cattle prices also pressure calf prices lower. So, while we have a reduced supply of beef cattle that normally signals stronger calf and fed cattle prices, a weaker beef demand for much of 2009 will continue to weigh down on cattle prices. There may be times throughout 2009 when supply is tight enough to generate nice price rallies. However, these are likely to be short lived, as overall demand gloom will keep the markets defensive for most of the year.