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Consumer Demand Drives Beef Industry
Ted C. SchroederProfessor of Agricultural Economics
Kansas State University
National Beef Industry Development Fund WorkshopSeptember 19, 2002
Calgary, Alberta
U.S. Retail Beef Demand Index,1980-2001 (1980=100)100
94
88 8683
7976
70 6966 65
6360 59 57 56
53 5350 52
5557
40
45
50
55
60
65
70
75
80
85
90
95
100
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Year
Ind
ex V
alu
e
Source: USDA & K-State
U.S. Beef Demand Index
Markets at each stagecoordinated chain, but worked poorly
- highly varied product- little price-quality distinction - no incentives to improve - huge loss of market share
Lack of Coordination
1. Tender2. Flavorful3. Consistently High Quality4. Convenient to Prepare5. Healthy & Nutritious6. Safe7. Competitively Priced
Consumers Demand
Percentage Willing to Pay a Premium over a Generic Steak
0%
50%
72%
80%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Generic Natural GuaranteedTender
Certified Angus
Steak Type
Per
cen
tag
e
Tenderness & Brands Matter
Spring 2002 K-Stateconsumer beef preference study
- 363 consumers-bid to exchange -real $, actual steaks
K-State 2002 StudyK-State 2002 Study
Median Premiums Willing to Pay for Steaks(half were willing to pay this or more)
$0.00 $0.10
$1.16
$2.66
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Generic Natural GuaranteedTender
Certified Angus
Steak Type
Pri
ce P
rem
ium
($/
lb.)
K-State 2002 StudyK-State 2002 Study
Tenderness & Brands Matter
Flavorful?
Fully Cooked Chicken Strips CategoryTotal U.S. Dollar Volume - ACNielsen
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
8/ 9/ 97 1/ 9/ 98 6/ 9/ 98 11/ 9/ 98 4/ 9/ 99 9/ 9/ 99
Convenience Matters
Source: AC Nielsen and NCBA
Convenience Matters
Shredded Cheese Sales Increase 84%
Source: AC Nielsen and NCBA
$739$828 $888
$956
$1,079$1,196
$1,316 $1,358
$400
$600
$800
$1,000
$1,200
$1,400
1991 1992 1993 1994 1995 1996 1997 1998
Sa
les
(m
illi
on
s)
$106 $168$312
$577
$889
$1,100
$91$82
$0
$200
$400
$600
$800
$1,000
$1,200
1989 1990 1991 1992 1993 1994 1995 1996
Mill
ion
s
Bagged Lettuce Sales: Convenience
Convenience Matters
Source: AC Nielsen and NCBA
Where’s the Action?
Beef industry will have segmentedmarkets with both similar and divergentneeds for each segment
Key to success will be to determine role ofproducers in effectively and profitablymeeting needs of the sectors
1. Fresh Branded Case-Ready Products
Vertical alliancesabound – some 60or more in U.S.
USDA has 50 beef certification programs
Weighted-Average of Respondent's Percentage of Cattle Marketed Under Marketing Agreements, by Year
22.5%
52.3%
65.3%
0%
10%
20%
30%
40%
50%
60%
70%
1996 2001 Expect in 2006
Year
Per
cen
tag
e o
f C
attl
eMar
ket
ed
Schroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, IowaSchroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, Iowa
Producers Changing Marketing
Cattle Feeder Motives to Form Marketing Agreement with Packers
Motive for Producer
Average
Those with Agreements
Those without Agreements
Obtain quality/yield grade premiums 6.2 6.5 5.8 Enables access to detailed carcass data 6.1 6.1 6.1 Guarantees a buyer for cattle 5.7 5.9 5.4 Reduces marketing time and costs 5.5 5.6 5.3 Sell cattle at a higher base price 5.1 5.3 4.9 Reduces price risk and/or basis risk 5.0 5.1 5.0 Facilitates financing arrangements 4.7 4.6 5.0 Pressured by packers 4.3 4.0 4.8 Number of Respondents 306 to 308 185 to 187 121
Scale: 1=strongly disagree to 9=strongly agree Source: Schroeder et al. 2002 Feedlot Survey
Producer Motivations
Schroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, IowaSchroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, Iowa
Source: Schroeder et al. 2002 Feedlot Survey
Weighted-Average Percentage of Respondent Fed Cattle Marketing Using Live or Carcass Weight, Grids, and Other Pricing
Methods, by Year
82.3%
52.5%
33.1%
15.6%
45.4%
62.1%
2.1% 2.1% 4.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 2001 Expect in 2006Year
Per
cen
tag
e o
f C
attl
e Live or Carcass WeightGridsOther
Cash Market Disappearing
Ribeye Steak Prices in Kansas City – April 1, 2000
LocationUSDA Grade
"Typical" Steak
"Hormone-free" Steak
Wild Oats none $11.99/lb.Hen House none $9.99/lb.Dean & Deluca Prime $24.95/lb.Dillons Select $7.49/lb.Dillons Choice $8.49/lb.Food-4-Less none $6.88/lb.Target Choice $4.99/lb. $9.49/lb.
Retail Steak Prices
Source: Lusk
2. Meal Packages
Single dish quick fix meal consumer expenditures expanded 83% in 2001 to $141 million – AC Nielsen
472 beef products introduced in 2001Compared to 70 in 1997 - NCBA
3. Food Service
Food service continuesto grow
Diversity of product needs
Quality control in volume are critical
Contracts
What do they require?
Product integrity
High level of accountability of input supplier
Product safety assurances – mega responsibility/risk
Production practice assurances (including location?)
Traceability
Consistent continuous supply
Critical Research Questions
1. How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment?
Critical Research Questions
1. How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment?
2. What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded?
Critical Research Questions
1. How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment?
2. What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded?
3. How will incentives to add value, innovate, and invest in development and research be rewarded?
Critical Research Questions
1. How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment?
2. What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded?
3. How will incentives to add value, innovate, and invest in development and research be rewarded?
4. How will producers manage increased risks associated with greater accountability/liability?
Volume of U.S. Beef Imports and Exports, 1987-2001
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
1987 1989 1991 1993 1995 1997 1999 2001
Year
Car
cass
Wei
gh
t (l
bs.
)
Exports
Imports
U.S. Beef Import Shares, 2001
CANADA32%
URUGUAY1%CENTRAL
AMERICA2%
MEXICO0%
BRAZIL5%
ARGENTINA3%
OTHER0%
NEW ZEALAND20%
AUSTRALIA37%
Primarilygrass-fedbeef importsfor groundor processed beef
U.S. Beef Export Shares, 2001
JAPAN45%
CANADA10%
MEXICO23%
CARIBBEAN1%
KOREA15%
RUSSIA0%
OTHER6%
Primarily offalsand high-qualityfresh table cuts
U.S. Beef Exports to European Union
Volume of US Beef Exports to the European Union
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Year
Me
tric
To
ns
EU bans importof beef producedusing synthetic growth hormones(95% of U.S. fed beef)
U.S. Food & Drug Administration (FDA)U.S. Department of Agriculture (USDA)World Trade Organization (WTO)Lamming Group (European Scientists)
All say growthhormones not food safetyconcern
Growth Hormones
U.S. Food & Drug Administration (FDA)U.S. Department of Agriculture (USDA)World Trade Organization (WTO)Lamming Group (European Scientists)
All say growthhormones not food safetyconcern
Growth Hormones
Yet, 54% of EU consumers indicated in 1998 surveythat food must not have hormone use to be safe(INRA, Europe)
“Consumer is King!”
No credible scientific evidence suggests it is a problem.
Vast majority of U.S. consumers not concerned with use of GMO crops in food or animal production
However,Only 30% of German consumers, 60% of France, and 63% of United Kingdom consumers unwilling to buy
food produced with GM crops.57% of German, 38% of France, and 39% of U.K.
consumers view GM crops as a health risk.(Source: Hoban)
Is Feeding GMO Grains a Problem?
Estimated Premiums Average ConsumersIndicated they would Pay for Steaks
UnitedSteak Attribute France Germany Kingdom U.S.
No Growth $9.94/lb. $7.29/lb. $7.39/lb. $8.12/lb.Hormones
Not fed GMO $9.32/lb. $7.67/lb. $6.31/lb. $3.31/lb.Grain
Source: Lust et al., 2002
Monthly Farmer's Share of Retail Beef Dollar,1990- June 2001
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Date
Far
m S
har
e (%
)What about Margins?
Inflation-Adjusted Farm to Wholesale Cutout Price Spread, 1990- June 2002
15
20
25
30
35
40
45
50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Date
Sp
read
(ce
nts
/lb R
etai
l)
Source: USDA, deflated using CPI 2001=100
Farm to Wholesale
Wholesale to Retail
Inflation-Adjusted Wholesale Cutout to Retail Monthly Beef Price Spread, 1990- June 2002
100
110
120
130
140
150
160
170
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Date
Sp
read
(ce
nts
/lb R
etai
l)
Source: USDA, deflated using CPI 2001=100
Are USDA Retail Prices Wrong?
Example of Impact of not Volume Weighting Beef Sales in Retail Price Reporting
$6.52$6.31
$4.68
$5.21
$1.97
$5.90 $5.75
$4.61$4.43
$1.83
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
Ribeye Top Loin Top Round Porterhouse Ground (75%)
Beef Product
Pri
ce (
$/lb
.)
Simple Average
Volume-Weighted
Error range:2% Top Round
18% for Porterhouse
(8% for ground beef)
Source: Lensing, Jones, and Purcell, 2002
