Demand study: Quality builds future for beef
People in the cattle business, especially those with cow-calf herds, are enjoying per-head income levels unimagined even a few years ago.
A glance at the corn market may remind them things can change, but a University of Missouri white paper says they can take action now to stay on a higher profit plane.
“Should Beef Quality Grade be a Priority?” That’s the title of a Master’s Thesis by Jillian Steiner and economist Scott Brown, which says quality drives the beef industry and holds the key to maintaining price strength. See the paper at http://www.cabpartners.com/news/research.php.
Elasticity of demand and price flexibility are two economic measures that point to USDA Prime and premium Choice brands as “luxuries” in some sense of the word. Yet, as beef herds rebuild, producers who aim for the premium targets are more likely to find buyers at higher prices in the future, the paper says.
Introducing the study during a fall field day at Thompson Research Center, Spickard, Mo., Brown asked a series of questions.
“What does today’s consumer demand from a beef product? All decisions are easy with record prices,” he says, “but what are you doing today that makes sure you can take advantage of market volatilities five to 10 years down the road?”
Noting the 87.7 million-head U.S. cattle inventory to start 2014 was the smallest since 1951, Steiner and Brown say drought and erratic markets delayed expansion. As that phase now begins, “Genetics, production and management decisions made in the near term will determine the future success of the beef industry.”
More importantly, producers must strive to sustain and improve beef demand, “the ultimate factor driving the size” of the cattle industry. There is much research on beef demand, but not on “disaggregating” it by quality grade, the paper says. A 1966 study showed each grade has its own demand pattern, and 2001 work examined seasonal elasticities by grade, but there was no comprehensive analysis.
Empirical estimates of own-price, cross-price and income elasticities for Prime, Certified Angus Beef (CAB) brand, USDA-branded Choice and Select should help determine the best production focus, the paper says. It made use of 10 years of USDA monthly load data and CAB company data to find answers.
Brown, noting a projected 2.5-billion-pound increase in pork and poultry supplies in 2015, says cattle producers would do well to shift production to quality grades that consumers do not readily abandon for other proteins.
Steiner quoted a number for Prime own-price elasticity of -2.33, which is also the number for Prime’s cross-price elasticity vs. other categories. (See Table 1)
“Prime, CAB and Choice have a lower cross-price elasticity than Select, which means price changes there have a smaller impact on the quantity of Select consumed,” she explains, noting the same is true in comparison to pork and chicken.
“With greater production driving down the price of pork and chicken, we can expect a stronger substitution impact on Select than on the higher quality grades,” Steiner says.
Looking next at income elasticities, she explains demand for all beef tends to increase with consumer income, but the increase is higher for the top end of quality.
In particular, the paper says a 1% rise in income should mean a 1.63% increase in demand for the CAB brand, which was the most responsive to this measure of elasticity among all beef quality levels studied.
When all aspects of demand are projected out to 2020, the logarithmic trend shows “an impact of 10.6 million pounds more Prime demanded, 175.23 million pounds more Branded/Choice (60 million of that CAB), but 62.32 million fewer pounds of Select demanded.”
Brown noted that the combined USDA Branded/Choice category includes CAB, which follows a positive trend of 0.14. That’s much closer to Prime’s 0.16, indicating some of the lower Choice product is likely following a negative trend to arrive at the average of 0.07.
As a category, he estimates premium beef has added $4.5 billion to the beef economy in the nine years from 2005 through 2013, including 630 million that last year.