Transcript Cattle Market Equilibrium

Measuring Beef Demand
James Mintert, Ph.D.
Professor & Extension State Leader
Department of Agricultural Economics
Kansas State University
www.agmanager.info/livestock/marketing
[email protected]
Kansas State University Department of Ag. Economics
A Picture of A Healthy Industry
Million Head
U.S. Cattle Inventory
January 1, 1925-1975
140
130
120
110
100
90
80
70
60
50
25
30
35
40
45
50
Year
Source: USDA & K-State Research & Extension
55
60
65
70
75
KSU Dept. of Ag Econ
www.agmanager.info
Kansas State University Department of Ag. Economics
A Shrinking Industry
Responding to a Lack of Profitability
U.S. Cattle Inventory
January 1, 1975-2006
140
130
Million Head
120
110
100
90
80
Current inventory is about 26%
smaller than in 1975
70
60
50
75
80
85
90
Year
Source: USDA & K-State Research & Extension
95
00
05
KSU Dept. of Ag Econ
www.agmanager.info
Kansas State University Department of Ag. Economics
Rising Productivity Is Partially Responsible
Dressed Beef Production
Per Cow Per Year
.
.
700
650
Beef Production Per Cow
30 Year Trend
600
Pounds
550
500
450
400
350
300
250
200
50
55
60
65
70
75
80
85
90
95
00
05
10
Year
Source: USDA & K-State Research & Extension .
Kansas State University Department of Ag. Economics
But Declining Consumer Demand for Beef
Was A Key Factor
Kansas State University Department of Ag. Economics
Beef Market Equilibrium
P
S
PE
D
QE
Q
Kansas State University Department of Ag. Economics
Beef Market Equilibrium
P
S
PE
demand
decline
P1
D
D1
QE
Q
Kansas State University Department of Ag. Economics
Goal of Beef Demand Index
• Provide a simple way of tracking demand
changes
• Provide approximate measure of demand
shift, compared to base year & recent years
– 1980 used as base year
– Coincides with approximate start of demand
decline
Kansas State University Department of Ag. Economics
How Do We Compute Demand Index?
• Adjust all prices for inflation using an
inflation index (Consumer Price Index)
• Need to differentiate between
– movement along an existing demand curve &
– shifts in demand
• Price changes attributable to changes
quantity are simply movement along an
existing demand curve
Kansas State University Department of Ag. Economics
Beef Market Equilibrium
P
S
S1
PE
P1
Movement from PE to
P1 is movement
along an existing
demand curve, i.e.,
no demand “shift”
D
QE Q1
Q
Kansas State University Department of Ag. Economics
How Do We Compute Demand Index?
• So we first compute an “expected” inflation
adjusted beef price
• “Expected” beef price uses price in base
year as starting point
– Use a measure of how responsive beef prices
are to changes in quantity to calculate
“expected” price
– Calculate expected price, if demand was held
constant at base year’s level, based upon
change in per capita beef quantity available
since base year
Kansas State University Department of Ag. Economics
Beef Demand Index &
Price Responsiveness to Supply Shifts
• Price Flexibility provides a measure of
percentage price change expected given a
1% supply change
• Price Flexibility used is -1.49
– 1% per capita supply increase expected to
yield 1.49% decline in inflation adjusted price
– Actual index values dependent on choice of
price flexibility, but pattern of demand largely
unchanged (Marsh, 2003)
Kansas State University Department of Ag. Economics
How Do We Compute Demand Index?
Beef Demand Index equals
Actual inflation adjusted retail beef price
X 100
Expected inflation adjusted retail beef price
Kansas State University Department of Ag. Economics
The Index Documents Demand Decline
Beef Demand 1980-1998
Annual Retail Choice Beef Demand Index
100
90
Index Value
80
70
94
88 86
83
79 76
70 69
66 65
62
60
50
40
59 58
56 55 53
51 50
30
20
10
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
Year
Source: USDA, Dept. of Commerce & K-State Research & Extension
Price Deflated By CPI, 1980 =100 for Beef Demand Index
KSU Dept. of Ag. Econ.
www.agmanager.info
Kansas State University Department of Ag. Economics
Beef Demand Decline Was Devastating
• What’s the linkage between retail beef
demand & cattle producers?
– Retailers demand for wholesale beef is derived
from demand for retail beef products
– Packer demand for fed cattle is derived from
demand for wholesale beef products
– Feedlot demand for calves & feeder cattle is
derived from demand for fed cattle
Kansas State University Department of Ag. Economics
Beef Demand Decline Was Devastating
• Who bore brunt of long-term beef demand decline?
– Feedlots & beef processors?
• No, margin operators adjusted to demand reductions
– Answer: Cow-calf producers
• How?
• Lower returns for cow-calf producers
– Labor
– Land
– Other capital
• Why?
– Industry size decisions are made by cow-calf producers
Kansas State University Department of Ag. Economics
Index Also Documents Demand Increase
1998-2004
Annual Retail Choice Beef Demand Index
100
90
80
Demand in ’04 Was Up About 25% from 1998 Level
Index Value
70
60
50
50
52
54
56
55
99
00
01
Year
02
59
63
40
30
20
10
0
98
Source: USDA, Dept. of Commerce & K-State Research & Extension
Price Deflated By CPI, 1980 =100 for Beef Demand Index
03
04
KSU Dept. of Ag. Econ.
www.agmanager.info
Kansas State University Department of Ag. Economics
What Happened in 2005?
1998-2005
Annual Retail Choice Beef Demand Index
100
90
Beef Demand During All of ’05 Decreased About 4%
But Demand in ’05 Was Still Up About 21% from 1998 Level
80
Index Value
70
60
50
50
52
54
56
99
00
01
55
02
59
63
61
04
05
40
30
20
10
0
98
Year
Source: USDA, Dept. of Commerce & K-State Research & Extension
Price Deflated By CPI, 1980 =100 for Beef Demand Index
03
KSU Dept. of Ag. Econ.
www.agmanager.info
Kansas State University Department of Ag. Economics
Demand Improved Steadily from ’98 through ’04
Downward Blip in ’02 Following 9/11
Annual Retail Choice Beef Demand Index
% Change From Prior Year
.
10%
8%
% Change From Prior Year
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Year
Source: USDA, Dept. of Commerce & K-State Ag. Econ.
Kansas State University Department of Ag. Economics
Downturn Got Underway in mid-2005
Quarterly Retail Choice Beef Demand Index
% Change From Prior Year
15%
% Change from Prior Year
10%
5%
0%
-5%
-10%
-15%
98.1
99.1
00.1
01.1
02.1
03.1
Year & Quarter
04.1
05.1
06.1
Source: USDA, Dept. of Commerce, & K-State Ag. Econ.
Kansas State University Department of Ag. Economics
Beef Demand Shifters
What’s been taking place recently?
Demand index does not indicate why shifts occur
• Possible reasons for recent downturn
– Low carb diet effect has worn off
– Larger chicken supplies
– Consumer’s disposable income growth slowing
• Expect more domestic demand weakness
• How do we turn this around?
Kansas State University Department of Ag. Economics
What About
The Impact of International Trade?
Kansas State University Department of Ag. Economics
U.S. Was A Net Exporter From 1981-2003
Net Exports of U.S. Cattle, Beef, & By-Products
1979-2005
3.00
2.50
2.00
Billion $
1.50
1.00
0.50
0.00
-0.50
79
81
83
85
87
89
91
93
95
97
99
01
03
05
-1.00
-1.50
-2.00
Source: U.S. Dept. of Commerce & LMIC
Year
Net Exports = Exports - Imports
Kansas State University Department of Ag. Economics
Top 5 Importers
Accounted for 91% of U.S. Exports
Top 10 Importers of U.S. Beef
Ranked by Value of Imports in 2003
Other Category Consists of All Other Destinations
$1,600,000
U.S. needs to
recapture these
markets to regain
$’s and volume
.
$1,400,000
.
$1,200,000
Value (Thousand $)
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
Japan
Mexico S. Korea Canada
Source: USDA-FAS
.
Hong
Kong
Taiwan
Russia
China
Kuwait
Egypt
Other
Destination
Kansas State University Department of Ag. Economics
Beef Imports From Canada Decline
Annual Beef Imports From Canada .
1.2
Billion Pounds
.
1.0
0.8
0.6
0.4
0.2
0.0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: USDA & LMIC, 2006 Projected
Year
Kansas State University Department of Ag. Economics
Result: U.S. Imports Falling Below 2005’s
Annual U.S. Beef Imports
4.0
3.5
Billion Lbs.
3.0
2.5
2.0
1.5
1.0
0.5
0.0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Year
Source: USDA & LMIC, 2006-2008 Forecasts
Kansas State University Department of Ag. Economics
Long, Slow Road to Export Recovery
Annual U.S. Beef Exports
3.0
2.5
Billion Lbs.
2.0
1.5
1.0
0.5
0.0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Year
Source: USDA & LMIC, 2006-2008 Forecasts
Kansas State University Department of Ag. Economics
Export Recovery Means Net Beef
Imports in 2007 Could Be 1/2 2004’s
Annual U.S. Net Beef Imports
3.5
3.0
Billion Lbs.
2.5
2.0
1.5
1.0
0.5
0.0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Year
Source: USDA & LMIC, 2006-2008 Forecasts
Kansas State University Department of Ag. Economics
Are Retail Demand Changes
Reflected At Farm Level?
• 1% increase in beef demand index increases
– Slaughter cattle price by 0.49%
– Slaughter cattle supply by 0.17%
– Feeder cattle price by 0.12%
– Feeder cattle supply by 0.34%
Source: Marsh, American Journal of Ag. Econ., 2003
Kansas State University Department of Ag. Economics
Are Retail Demand Changes
Reflected At Farm Level?
Beef Demand Increased about 6% from 1998 – 2000
– Boosted consumer spending on beef
by $2.16 billion
• Estimated producer share about 42%
• Estimated processor & retailer share about 58%
Source: Marsh, American Journal of Ag. Econ., 2003
Kansas State University Department of Ag. Economics
Do Farm Level Demand Changes Mirror
Retail Demand Shifts?
• Spread between retail and farm level
prices is variable
• Variability attributable to variety of factors
– Volume
– Capacity utilization
Kansas State University Department of Ag. Economics
Margin Shifts Can Mask Impact
of Retail Demand Shifts
Farm-To-Retail Marketing Margin
Monthly, Inflation Adjusted
120
Cents per Lb. (Retail Weight)
110
100
90
80
70
60
50
Jan80
Jan82
Jan84
Jan86
Jan88
Jan90
Source: USDA, Dept. of Commerce, K-State Ag. Econ.
Jan92
Jan94
Jan96
Jan98
Jan00
Jan02
Jan04
Jan06
Year & Month
Kansas State University Department of Ag. Economics
Retail vs. Farm Level Demand
Policy Implications
• Retail beef demand is primary demand
• Demand for fed & feeder cattle derived from
retail beef demand
• Retail beef demand shifts are felt at farm level
• In short run other factors, primarily margin
variation, can mask impact of retail beef
demand shifts
• In long run, consumer demand is paramount
Kansas State University Department of Ag. Economics
Index Concerns
• Quality of retail price data
– Relying on Bureau of Labor Statistics prices
– Prices are not volume weighted
– Omits all of HRI trade
Kansas State University Department of Ag. Economics
Improving The Index
Develop Index using scanner based retail price
data
– Included in Mandatory Price Reporting legislation
– Scanner based prices are volume weighted
– Better measure of what consumers pay
– But we need
• A longer data series
• Research that documents price flexibility with new prices
– Still omits HRI trade
• Longer term is a step in the right direction
Kansas State University Department of Ag. Economics
Is Another Demand Measure Needed?
• What’s the objective?
– Consumer initiative decisions should rely on
consumer level demand information
• Demand measures at other marketing
levels
– Wholesale
– Farm
• Will be driven in part by margin variation
Kansas State University Department of Ag. Economics
Is Another Demand Measure Needed?
• Demand Indexes do not explain why demand
shifted
– Development of other demand measures will
necessitate research/information regarding why
demand measures differ
– Differences will focus heavily on margin variation
Kansas State University Department of Ag. Economics
Kansas State University Department of Ag. Economics