Supply and Demand of Beef Chart

Prosperity of all beef industry participants hinges critically upon consumer demand," says Ted Schroeder, noted agricultural economist and manager of the Center for Risk Management at Kansas State University (KSU).

"Every new dollar that enters the industry comes from the consumer. Without the consumer, we are out of business. Information technology's absolutely disquisitional, as an industry, that we recognize that — and that we realize everyone in the industry plays an important part in demand formation," Schroeder explains.

It's too easy to call up of beef as a singular commodity, rather than the sprawling array of specific products that contain the market category. As such, it's also often tempting to consider beef demand every bit one thing.

In fact, beef demand varies beyond the carcass at whatever given point in time for different primals, subprimals, specific cuts, ground beefiness and beef diversity meats.

For our purposes here, though, let's focus on aggregate beef need, depicted past the elementary demand curve that is familiar to many.

Need vs. consumption

Commencement, keep in heed that demand is unlike than consumption.

Beef consumption — expressed every bit pounds of beefiness consumed per capita — is a office of beefiness production.

Glynn Tonsor, another noted KSU agricultural economist, explains that domestic beef consumption simply reflects beef availability. It is the sum of domestic beef production and imported beef, minus beef exports — for specific periods of time — divided by the U.S. population, with some small-scale adjustments fabricated for beefiness in cold storage.

"If you increase population and nothing else, per capita consumption declines," Tonsor explains. "If you increase supply and nothing else, per capita consumption increases. Information technology says goose egg about demand in either case."

How demand works

Demand, on the other paw, refers to the quantity of beef consumers will buy at diverse prices. That's what the need curve depicts.

All else beingness equal, equally the supply of beef increases, the cost consumers volition pay declines. As supplies subtract, consumers will typically pay more. As well, the bones supply curve suggests that as prices increase, more supply will exist fabricated available, and less every bit prices subtract.

In the parlance of economists, consumer demand for beef is referred to as main demand.

"When consumer demand increases, consumers are willing to pay more than for the same corporeality supplied, or they will buy more at the prevailing cost," Schroeder explains. At that place's more quantity supplied and more than beef demanded at higher prices.

Ultimately, variations in aggregate consumer beef need support or force per unit area prices producers receive for fed cattle and feeders.

In fact, co-ordinate to research past Melissa McKendree, Extension economist at Michigan Country Academy, across decades, a 1% increase in beefiness demand typically yields a i.52% increase in fed cattle prices and a 2.48% increase in feeder cattle prices. The opposite is true, besides.

For illustration, suppose the average negotiated cash fed cattle cost at a particular indicate is $125 per cwt, when the all fresh beef demand index is 89. If the index dropped to 84 a year after — demand declined past 5.six% — then McKendree's work suggests the cash fed cattle cost would be viii.5% less, or $114.38.

"That'due south how stark the impact of need is at the producer level," Schroeder says.

Why the coronavirus matters

Demand is why the length and depth of the domestic economical recession spawned by COVID-19 matters so much to producer pocketbooks.

On the one mitt, previous work done by Tonsor and Schroeder indicates consumers are becoming less price-sensitive when it comes to meat.

In other words, they're less likely than they used to exist to trade abroad from beef for a competing protein based on fluctuating price differences. At the same time, though, they're besides more sensitive to total food expenditures.

"If beef demand is more sensitive to income and expenditures, that means it's becoming more sensitive to macroeconomic conditions," Tonsor explains.

Related but different

Besides primary consumer beefiness demand, Schroeder explains there is what'due south termed derived need. Actually, there are several unlike derived demands (Figure 1). For purposes here, we'll concentrate on beef flowing through the retail channel, but the same applies to beef destined for food service or export.

Agreement shifts in derived beef demand at specific points in time is complex. For instance, even when consumers are willing to pay more for beefiness, the retailer ownership wholesale beefiness may non be.

Likewise, the packer may not be willing to pay more than for fed cattle. The primary reason in the latter two cases has to practise with price.

Snug up the cerebral sure-fire

Derived demand by grocers reflects the prices they are willing to pay for a given quantity of beefiness at the wholesale level. At that place'south a retail beef toll and a wholesale beef cost.

"The difference in those prices in a competitive market is the cost of getting wholesale beefiness to the retail meat case for the consumer," Schroeder explains.

"Costs include transportation, energy to keep the store going, labor, restocking, everything it takes to go beef from the dorsum of the packing found to the retail counter for consumers."

Suppose those costs increase. Derived need by the grocer declines, which equates to a lower wholesale price for the same quantity of beef supplied.

"The main consumer isn't irresolute their demand; it'south the wholesale demand," Schroeder explains.

"Likewise, if costs decline — if energy costs decline, for instance, or if new technology is adopted that increases shelf life — that would shift derived demand past the grocer upward."

Schroder explains the deviation between derived packer demand and derived grocer demand is the cost the packer incurs to catechumen cattle into wholesale beefiness.

"Suppose the packer has a major labor shortage, and their costs for labor become upward significantly. Zippo happens to primary consumer need or derived grocer demand, only derived packer demand shifts downwardly and farm prices for fed cattle decline," he says.

Reality check

Market reaction in the wake of packer labor challenges spawned by the pandemic serves as a sterling case of how all of this plays out in reality.

Almost overnight, beef packing capacity declined significantly, every bit plants were forced to close or operate at slower speeds due to added safety precautions.

Sharply increased packer costs shoved derived packer demand lower, significant lower prices for fed cattle.

At the aforementioned time, the quantity of beef supplied declined, pushing wholesale and retail beef prices higher.

"We heard a lot of questions about how it was possible that farm prices could refuse while wholesale prices increased, if the market place was fifty-fifty halfway performance," Schroeder says.

"It's a marketplace phenomenon. The direction of toll change and the magnitude of change is exactly what our need models suggested. We're surprised by the veracity of the event every day, merely we're non surprised by what the market place responses have been."

Note: Schroeder and Tonsor shared these insights during the webinar series Intersection of the Cattle and Beefiness Industries, hosted by Extension services at North Dakota State University, Texas A&M University and West Virginia University's Davis Higher of Agriculture. You tin find the series at bit.ly/ndsuleiw.

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Source: https://www.beefmagazine.com/beef/beef-demand-everything

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