Meat Priees — Too High or About Right?by CLIFTON B. LUTTRELL

I HE SHARP increases in retail meat prices inrecent months have been the subject of much discus.sion. The increases have had a major impact on totalconsumer outlays since meat expenditures account forabout one-third of the average family food budget.Reflecting their disappointment at these higher costs,some people have accused farmers, meat packers, andgrocery stores of “gouging consumers” by forcing meatprices up. These views are generally stated without afull understanding of the underlying economic pro-cesses involved in price determination.

This article presents an economic analysis of theforces which have led to meat price increases boththis year and over a longer-run period. The analysisemphasizes the function of the market system in pric-ing meat, in allocating meat products to consumers,and in allocating resources to meat production. Aspointed out by Kenneth Boulding in rhythmic form,the production and allocation of food involves bothhumane and incentive considerations.

The young, the old, the sick, the crazyEven the shiftless, and the lazy,Eat at the common human tableSpread by the Active and the Able.The problem is, to organizeThis monumental enterpriseSo that — to see that all are boarded —

Both Need and Virtue get rewarded.’

The consumer price index for all meat2 in the firsteight months of this year averaged 9 percent abovethe average for the same period a year ago. This, how-ever, was just one episode in the upsurge of meatprices, With the exception of one minor setback, aver-1Kenneth E. Boulding, Principles of Economic Policy (Engle-

wood Cliffs, N.J.: Prentice-Hall, Inc., 1958), p. 233.2Beef and veal, lamb and mutton, pork, fish, and poultry.

~/Meat ‘

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age meat prices have risen since 1964 (Chart I). Aver-age consumer prices for meat rose at a 12.9 percentannual rate from late 1964 to early 1966. They de-clined slightly in late 1966 and early 1967, rose some-what from late 1967 to early 1969 when they accel-erated again, rising at a 10.4 percent rate until April1970. They held almost stable from April 1970 to early1971 when the recent acceleration began.

Economic Analysis of Price Determination

An economic approach to factors determining pricesof meat or any other commodity is developed briefly

.

Chart F

Price Trends - Meat, Meat Animals,and All Consumer Items

Ratio Scale Ratio Scalel950~54rl00 l950-54~t00ISO . . 180170 170

160 160

150

140

130

120

110

00

90

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70

60

150

140

130

120

110

100

90

80

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60

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FEDERAL RESERVE BANK OF ST. LOUIS

in this section. The analysis holds that changes in meatprices at grocery stores result from a series of economicfactors rather than arbitrary decisions by farmers,meat packers, wholesalers, and retailers. Behind retailprice increases is often found greater consumer de-mand as indicated by a rising volume of sales. Whenthe demand for a commodity increases, the firstchange one typically observes is a higher sales volumewhich results initially in a reduction of inventories. Inorder to restore depleted inventories retail grocersincrease their meat orders fmm packers hoping tocontinue selling a larger volume at the prevailingprice. Upon receiving increased orders for meat thepackers in turn increase their rate of meat slaughterand seek to restore meat animal inventories by addi-tional purchases from farmers. Since the prevailingprice only provides sufficient incentive for producingthe current number of animals, additional animals arenot available for immediate delivery at current prices.As packers compete among themselves in an attemptto obtain more animals, they raise their offering pricesto farmers.3

In the short run the number of animals availablefor marketing is relatively fixed. The number of ani-mals on farms cannot be increased rapidly and theincrease in meat production per animal is relativelylimited. In other words, the supply of meat is “in-elastic” with respect to price in the short run; only asmall percent increase in quantity will be forthcomingwith a relatively large percent increase in price. Sucha short-run supply curve is indicated by the relativelysteep upward sloping line S~in Figure I. With thedemand for meat represented by the curve D1 andsupply represented by S~the price is P1. An increasein demand to D2 results in a relatively sharp short-run price increase as shown by the D2-51 intersectionat P2.4

Over the longer run, however, the supply of meatis more “elastic,” meaning that with each incrementalincrease in price, a larger quantity will be offered thanin the short run. This situation is illustrated by thesupply curve ~2, wherein a small increase in priceprovides incentive for a relatively large increase inproduction. Civen sufficient time, farmers and ranch-ers find it profitable to expand their meat animal

3See Armen A. Alehian and William H. Allen, UniversityEconomics, 3rd ed. (Belmont, California: Wadsworth Pub-lishing Company, Inc., 1972), pp. 95-97, and Kenneth Bould-ing, “A Liquidity Preference Theory of Market Prices,” Col-lected Papers — Boulding (Boulder: Colorado Associated Uni-versity Press, 1971), pp. 135-143.

~The shift of the demand schedule from Di to Da indicatesthat consmners have registered in the market a willingness topurchase larger quantities of meat at each price.

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breeding herds and produce additional animals forslaughter. The fact that the long-run meat supplycurve is more elastic than the short-run supply curvemeans that a given increase in demand for meat has asmaller impact on prices after passage of some time.For example, the rise in demand from D1 to D2would result in the relatively small price increasefrom P1 to P8 in Figure I after farmers have adjustedmeat animal production to the new demand condi-tions. Nevertheless, with an upward sloping supplycurve any upward shift in the demand for meat in-volves a rise in the price paid by consumers. Thehigher price equates the larger amount demandedwith the amount supplied.

Conversely, advancements in production technologywhich tend to increase supply (shift the supply curveto the right), or declines in meat demand, result inlower prices. More meat animals are offered to pack-ers and more meat to consumers than can be sold atprevious prices. Prices are thus marked down by retailgrocers until the quantity of meat demanded by con-sumers equals the amount supplied.

Demand for Meat has IncreasedDemand for meat has increased substantially in

recent years, as evidenced by the fact that consumershave purchased larger quantities of meat at higherprices. Factors contributing to the greater demandinclude rising per capita incomes, increased food sub-sidy programs, and a larger population.

FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1972

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During the period of rapid increase in average meatprices from 1964 to 1971 as shown in Chart I, totalmeat consumed rose from 42 to 52 billion pounds, anincrease of 22 percent. Per capita consumption rosefrom 224 to 253 pounds, an increase of 13 percent.The rise in per capita consumption was at a fasterrate during this period of rapid price increase thanduring the previous 14 years (1950-64) when priceswere relatively stable. In the recent period total meatconsumption per capita rose at an annual rate of 1.8percent, whereas from 1950 to 1964 per capita con-sumption rose at the rate of 1.6 percent (Chart II).According to the United States Department of Agri-culture per capita consumption of meat will increaseslightly again this year. An estimated decline of onepercent in red meat consumption will be more thanoffset by a four percent increase in poultry.

The fact that meat consumption has increased re-veals little about meat demand without informationon prices.5 Meat consumption, like consumption ofany other commodity or service, depends in part uponits price. Civen no change in the demand schedule(line l)~in Figure I), a decline in meat prices will

5Economists explain a larger quantity of a good being pur-chased in two different ways. One way is for the demandschedule to shift to the right, indicating a greater quantitywill he taken at each price. The other way is a movementalong a given demand schedule, indicating that price changesare the result of a shift in the supply schedule. The lattermeans that larger quantities are purchased only at lowerprices.

induce consumers to purchase a larger quantity. Forexample, a larger volume of meat production causedby livestock cycles or by unusually favorable weatherconditions will increase the supply and result in lowerprices. The lower prices will induce some consumersto purchase larger quantities of meat. This is indicatedby the downward slope of the D1 line in Figure I.Conversely, a cyclical or seasonal decline in meatoutput will cause an increase in meat prices, whichwill in turn cause some consumers to substitute othertypes of food for meat and reduce their meat pur-chases. These short-run shifts in supply can causeprice changes without a shift in demand. For example,a shift of the supply curve S~to the left will intersectthe demand curve D1 at a higher ps-ice. Such short-run shifts in supply have no doubt been a factor inthe irregular upward course of meat prices since 1964.However, consumers have purchased larger quantitiesof meat at higher prices per pound indicating thatdemand has increased.

While numerous factors contribute to rising meatdemand, rising per capita personal income is perhapsthe most important. In numerous studies researchanalysts have found that rising demand for meat re-sults from gains in per capita income.0 Per capitaconsumption of beef, veal, lamb, pork, and poultryhave all been positively associated with income. Allstudies confirm the common explanation that as per-sonal incomes rise people spend more for food.

Personal incomes have accelerated since the mid-1960s. Disposable personal income rose at the averageannual rate of 5.9 percent from 1950 to 1955, at 4.9percent from 1955 to 1960, and 6.2 percent from 1960to 1965. With the rising rate of inflation, personal in-come growth accelerated to 7.8 percent per year from1965 to 1970 and has continued at a relatively high6.9 percent rate since 1970 (Table I). While the ac-celeration in personal income growth has been pri-marily in nominal rather than real terms, it has added

6For examples of such studies see Edward Uvacek, Jr., “ANew Look at Demand Analysis for Beef,” American Journalof Agricultural Economics (November 1968), p. 1505; WillardWilliams, “The Meat Industry,” Market Structure of Agri-cultural Industries, ed. John H. Moore and Richard C. Walsh(Ames: The Iowa State University Press, 1966), p. 40; LarryLangemeier and Russell C. Thompson, “Demand, Supply,and Price Relationships for the Beef Sector, Post-World WarII Period,” Journal of Farm Economics (February 1967), p.179; Frederick Lundy Thomsen and Richard Jay Foote, Agri-cultural Prices (New York: McGraw-Hill Book Company, Inc.,1952), p. 362; and Russell C. Thompson, J. Michael Sprott,and Richard W. Callen, “Demand, Supply, and Price Relation-ships for the Broiler Sector, with Emphasis on the Jack-KnifeMethod,” American Journal of Agricultural Economics (May1972), p. 247.

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FEDERAL RESERVE BANK OF ST. LOUIS

Table I

Disposable Personal Income and inflation(Annual Rates of Change)

DisposablePersonal Income lnfiotian~

1950-1955 5.9 . 2.5:’.

1955-1960 4.9 2.6

1960 1965 6.2 1.4

1963-1970 7.8 4.1

1970-1972 69’ • 4.2’’

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Ct - I’S. Dcssart,ns ~st f Cuu,n.’-. i.,

to nicat clemarsti by pru\ uliisg issun’ dollars for tilefamily budget.

The contribution of rising personal incomes to thehigher demand for meat is indicated by the pattern ofconsumer expenditures. While the share of total con-sumer expenditures spent on meat declined substan-tially in the early post World War II years, it leveledoff in the mid-1960s (Table II). In 1950 purchases ofred meat, poultry, and fish accounted for 7.4 percentof total consumer expenditures, but by 1965 such pur-chases had declined to 5.6 percent of the total. Since1965 the share of total consumer expenditures spenton meat has held constant and total outlays for meathave risen at the same rate as outlays for otherpurposes.

Table II

Estimated Meat Expenditures as Percentof Total Consumer Outlays

(Dollar Amounts in Billions)

Total Personal Meat asConsumpt.on Total Meat PercentExpenditures Expenditures of Tatal

1950 $191.0 $14.2 7.4%

1955 254.4 16.4 6.4

1960 325.2 20.0 6.2

1965 432.8 24 I 5.6

1970 616.8 35.0 5.7

1971 664.9 36.5 3.5

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Among the foods, the proportion of expenditures onmeat has turned upward in recent years. In 1965 allmeats accounted for about 35 percent of the totalexpenditures on food consumed at home (Table III).By 1970 the meat portion of food-at-home expendi-tures had increased to 39 percent, and the quantityof meat consumed per capita had increased sharply.Furthermore, evidence indicates that the higher pro-

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OCTOBER 1972

Table Ill

Importance of Meat in the Food-At-Home Budget(Percent of Food-of-Home Outlays)

Red Meat Poultry Fish Total

1960 28.3 4.]:- 2.9% 35.2’i

1965 27.8 4.1 2.9 34.7

1970 31.1 4.3 3.3 38.7

1971 31.3 4.2 3.4 38.9

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port is ‘n sf such expelid itli res for meat I sas continuedinto 1972. Per capita consumption of red meat in thefirst six months was about one percent less than a yearago, but the decline was more than offset by a sixpercent increase in poultry consumption. This increasein consumption of red meat and poultry combined.along with the sharp rise in prices, points to a con-tinuation of the upward trend in demand for meatand in consumer expenditures for meat in relation toother foods.

‘.hs :zes Have LflC~Fe;iieet(

Larger Covernment issues of food stamps to thelower income groups and increased donations of meatproducts to schools, institutions, and low-income fam-ilies occurred during the recent upswing in meatprices. Total issues of food stamps rose from less than$1 billion in 1969 to more than $3 billion in 1971and to an annual rate of $3.4 billion in the firsttwo quarters of 1972. Federal outlays on the schoollunch program have more than doubled during thelast two years, rising from $227 million in 19-69 to $594million in 1971. Food distributions to low-income fam-ilies, institutions, and others also have increased, butat a lower rate than the school lunch programs. Totalcost of the Federal food programs, including foodstamps, food distribution, and money donated forfood purchases, rose from $1.2 billion in 1969 to $3.1billion in 1971 and to an annual rate of $3.5 billion inthe first half of 1972. In 1969 Government outlays forthese programs amounted to only 1.4 percent of thetotal costs of food used at home by all consumers. B)’1971 these outlays amounted to more than 3 percentof total food-at-home costs, and this year they maytotal 3.7 percent.

An important effect of the food stamp program hasbeen to shift the recipients to higher income bracketsfor food consumption purposes. As indicated earlier,studies of meat demand show that such a shift pro-duces a sizable increase in meat consumption, whichmay be partially offset by a reduction in consumptionof some other types of foods such as dried beans,

FEDERAL RESERVE BANK OF ST. LOUIS

cereals, and fresh potatoes.7 In addition to the in-creased demand for meat resulting from the foodstamp program, the share of meat in direct Govern-ment food donations has been rising sharply in recentyears. In constant dollar tenrss, donations of all live-stock products rose 11 percent from 1970 to 1971 anddonations of meat rose by one-third.8

Although the food stamp program and other Gov-ernment food donations are intended to improvethe diets of the lower income groups, it is unlikelythat total food expenditures rise by the same dollaramount as such donations. Some of the recipients willlikely use less of their own earnings for food purchasesas a result of the programs. Nevertheless, the pro-grams may have added one or two percent to totalfood expenditures since early 1971 and a somewhatgreater percentage to total meat expenditures.° Thisincrease in food subsidies was a factor contributing tothe recent increase in demand for meat.

.hnaact Poi~n.ilat.iea(.rotvth

An increasing population has certainly been a factorin the rising demand for meat, but it has been lessimportant during the sharp increases in meat pricessince 1964 than in earlier years. The nation’s popula-tion grew from 192 million in 1964 to 207 million in1971, an annual growth rate of 1.1 percent. This, how-ever, was well below the 1.7 percent annual popula-tion growth rate from 1950 to 1964 when meat priceswere relatively stable. Also, during the sharp increasein meat prices since last year population has increasedat less than a one percent rate.

Meat SupplyOver the longer run, production technology and

imports have tended to increase the nation’s meatsupply and offset part of the impact on prices of therising demand for meat. As shown in Charts I and II,meat production plus net imports have risen at a suffi-cient rate to provide consumers with increasing quan-tities at less than average price increases for otherconsumer items. From 1950 to 1971, red meat andpoultry production combined rose from 25.9 to 48.4billion pounds per year, a 3 percent annual rate ofgain. Production of red meat rose from 22.1 to 37.8billion pounds, an annual rate of 2.7 percent, while

Tunited States Department of Agriculture, National FoodSituation (May 1969).

8lbid. (August 1972).

9This assumes that the gaits in meat consumption by thelower income groups is not offset by a reduction caused bythe increased taxes on the higher income groups.

OCTOBER 1972

output of chickens almost tripled. Meat imports in1971 were equivalent to 6 percent of domestic redmeat production, whereas imports were insignificantin 1950. Meat import controls were relaxed this year,and if they are not reimposed, rising meat productionin other nations, along with rising domestic meat pro-duction efficiency, should have an even more favorableimpact on the nation’s meat supply in future years.

Between 1950 and 1971, when meat consumptionwas increasing rapidly, prices of meat animals roseless than one percent per year, and red meat pricesrose only 1.8 percent per year. Poultry prices de-clined about one percent per year. In comparison, theconsumer and general price indexes rose at averageannual rates of 2.5 and 2.8 percent, respectively.

As indicated earlier, the long-run supply curve S2

in Figure I, which assumes no change in technology,is relatively elastic, indicating that a small increase inprice provides sufficient incentive for a sizable gainin production. In addition, over the very long runrapid gains in technology increase the efficiency ofcrop and livestock production causing the supplycurve to shift to the right, assuming general pricestability for other goods and services. The man-hoursof labor used for crop production are now less thanone-third the number in 1950, and labor used forlivestock production has declined more than 50 per-cent. Efficiencies in feed utilization have increasedsubstantially for poultry. Overall, the productivity in-dex for agriculture (output per unit of input) rose 36percent from 1950 to 1971.10 These efficiency gainstended to offset the price effects of rising meat de-mand and reduce meat prices from the early 1950suntil the mid-1960s.

In the mid-1960s, however, accelerated monetarygrowth led to general price inflation which had ad-verse effects on the supply of meat. Inflation, whichhad averaged less than 2 percent per year in the early1960s, accelerated to more than 4 percent per yearafter 1965 (Table I). This higher rate of monetarygrowth raised the demand for all goods and servicesand for productive resources. Meat producers werethus faced with rising production costs and the meatsupply curve S2 shifted to the left (Figure I). Inother words, at each level of meat prices followingthe inflation, producers were willing to produce lessmeat than previously because of higher productioncosts. The accelerated monetary growth was thus amajor factor in the sizable increase in average meatprices. It contributed to an increase in the demand

lOunited States Department of Agriculture, Changes in FarmProduction and Efficiency.

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FEDERAL RESERVE BANK OF ST LOUIS OCTOBER 1972

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for meat through its impact on personal incomes (in or long periods of apprenticeship. Virtually all are freenominal terms) and at the same time tended to re- to enter all phases of meat production and distribu-duce the meat supply. Its impact along with other tion. It has numerous participants in all stages of pro-factors contributing to a growing meat demand thus duction and distribution The efficient prosper andtended to submerge the impact of factors increasing the inefficient fail. This incentive has permitted thethe supply of meat since 196-4. price mechanism to brng into equality the quantity

of meat supplied and demanded at a relatively high

Concluding Comments and Summary level of consumption per capita and at prices whichhave risen only moderately compared with other con-

The data indicate that meat prices in recent years sumer items.have been determined largely by ba ic supply anddemand conditions, As indicated by reports of the If people want more meat they will bid up theNational Commission on Food Marketing the meat price and the higher prices of meat will provide theindustry is reasonably competitivc (see screened in- incentive for increased production. Productive re-sert). With the exception of the Government crop sources will flow freely to this sector when anticipatedcontrol and price support programs and import re- returns are attractive. The higher meat prices in re-strictions, the meat industry has generally operated in cent years have been necessary to attract the addi-a competitive free enterprise atmosphere. tional resources used in producing the larger volume

of meat demanded by consumers. If prices had beenThe meat industry meets -x majoi competitive test set arbitrarily ‘it a lower level a smaller volume would

of easy entry and exit. The industry is not hampered have been produced and some consumers wouldby rnles and regi litions such as chartering, licensing have had less meat. Therefore, in the absence of a

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FEDERAL RESERVE BANK OF ST. LOUIS OCTOBER 1972

responsive price system in which the quantity sup-plied and the quantity demanded are equated, theavailable quantity must be rationed among consumersby some other means.

In summation, the fact that meat prices have in-creased sharply since last year and have generallyrisen since 1964 is not a sufficient reason for the be-lief that the consumer is being taken advantage of orthat the meat industry is callous or inefficient. Themeat industry is reasonably competitive and takesadvantage of developing technology. Meat produc-tion has increased at a high rate since the upwardtrend in meat prices began in 1964.

Excessive monetary growth and other forces whichled to a sharp increase in demand for meat and aslower growth in supply have been the chief factors

contributing to the higher prices since 1964, ratherthan basic problems in the industry. Consumers havedemanded a higher level of meat production percapita and have paid a higher price for the increasedoutput.

The higher prices were necessary to provide incen-tive for producers to supply the amount of meat de-manded. Without the higher prices output wouldhave been less. Unforeseen events such as livestockcycles and unusual weather conditions may causelivestock and meat prices to fluctuate around theirlong-run equilibrium levels. However, given the gen-erally competitive conditions in the industry, themarket price of meat is always near that level re-quired to match production with consumer demand.The recent price increases were probably no excep-tion to this general rule.

/ /

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