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Why Is Beef Demand Growing As Per-Capita Income Shrinks?

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As domestic per-capita wealth overall declines, there is a growing demand for pricier beef.  Here are three reasons for the wealth-beef paradox.

The economic gap between haves and have-nots in the U.S. continues to widen.

According to Trends in the Distribution of Household Income Between 1979 and 2007 from the Congressional Budget Office (CBO) in 2011, the inflation-adjusted average household income in the U.S. grew by 62% between 1979 and 2007.

For the 1% of the population with the highest income, average real after-tax household income grew by 275%, according to the report. For the 60% of the population in the middle of the income scale (the 21st through 80th percentiles), the growth in average real after-tax household income was just under 40%. For the 20% of the population with the lowest income, average real after-tax household income was about 18% higher in 2007 than it had been in 1979.

According to The World Top Incomes Database from the Paris School of Economics, in 2011, the top 10% of U.S. households for annual income represented 46.54% of the nation’s income, compared to 43.1% in 2000, 38.9% in1990, and 32.9% in 1980.

The average annual income for the top 10% was $234,648 in 2011, $239,202 in 2000, $181,096 in 1990, and $139,912 in 1980.

The average annual income for the bottom 90% was $29,946 in 2011, 35,074 in 2000, $31,689 in 1990, and $31,755 in 1980.

“As a result of that uneven income growth, the distribution of after-tax household income in the United States was substantially more unequal in 2007 than in 1979,” says the CBO report. “The share of income accruing to higher-income households increased, whereas the share accruing to other households declined. In fact, between 2005 and 2007, the after-tax income received by the 20% of the population with the highest income exceeded the after-tax income of the remaining 80%.”

Closer to home, the Consumer Price Index (CPI) for beef and veal was 6.4% higher year-to-year in 2012; the overall CPI for Food was up 2.6%. It was 2.0% higher in 2013 when the overall CPI for Food was 1.4% higher. The CPI for beef and veal is estimated to grow 3.0-4.0% higher this year, according to USDA’s Economic Research Service, while the overall CPI for Food is expected to increase 2.5-3.5%.

None of that should be positive news for commodity products with a high price compared to substitutes; beef vs. chicken and pork in this case.

Yet, since 2010, the annual Retail Beef Demand Index (RBDI) for all fresh beef increased, year-to-year, 1.96%, 3.57% and 1.80% (2011, 2012 and 2013, respectively). During the same timeframe, the annual RBDI for Choice beef has increased 1.26%, 1.61% and 2.59%, respectively. The quarterly RBDI for Choice was up, year-to-year, 4.35% and 3.06% in the last two quarters of 2013.

 

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There’s no simple explanation for this paradox between dwindling domestic per-capita wealth overall in tandem with growing demand for pricier beef. However, I suspect part of the unscientific but observational answer includes:

Beef may still be a commodity, but producers and purveyors are learning how to add value to various commodity components, and consumers recognize it. Certainly, the broad brush of quality grades seems to reflect this with demand growing the most for Choice.

Of course, the percentage of carcasses grading Choice is increasing, too. According to the Livestock Marketing Information Center (LMIC), “The percentage of cattle grading Choice has posted large year-on-year increases since early September, in tandem with a notable drop in carcasses receiving the next lower quality grade, Select.” Compared to a year ago, LMIC analysts explain Choice percentage was 3.8% higher in the most recent data (week ending Jan. 11), while Select decreased 2.6% and lower quality grades decreased 1.4%.

Even consumers most sensitive to price are proving reluctant to walk away from beef entirely. They may trade down within the beef offering, and their beef purchases may be more infrequent, but they don’t simply quit eating beef.

At the other end of the economic spectrum, a significant portion of beef consumers appear to be rather price insensitive. At least to this point, they keep on consuming beef the way they have in the past, no matter the increasing price.

The rest of the world has a growing appetite for beef. U.S. beef exports in November surged 11% in volume and 16% in value compared to November 2012, putting 11-month totals at nearly 1.1 million metric tons (mt), up 3% from a year ago. According to the U.S. Export Federation (USMEF), export value reached $5.61 billion, an 11% increase over last year’s pace and already ahead of the 2012 year-end total of $5.51 billion.

Beef exports accounted for 14.3% of total U.S. beef production (muscle cuts plus variety meat) and 11% of muscle cuts alone compared to 12% and 9%, respectively, in November of 2012.

The beef export value per head of fed slaughter in November jumped to $267.36, an increase of $51.41 over last year.

These suppositions and lots of others will be tested severely in the coming months.

Buoyed by tightening supplies and firming wholesale prices, fed cattle prices reached record-high levels the week of Jan. 20. Packers bid $147/cwt. for cash fed cattle in the Southern Plains that week. They bid $150 in the North on a live basis and $240 in the beef. Just a month earlier, live prices were around $130-$131 and dressed prices were mostly $208.

Choice wholesale values, which typically languish for a spell when the year changes, shot up $43.26/cwt. in the same month’s span. Select had increased $49.01/cwt.

Disruptions in the beef marketing chain due to severe winter weather contributed to stouter wholesale beef values, as did the way USDA calculates cutout values. But the price surge was still amazing considering how difficult even $200/cwt. was to achieve for Choice cutout last year, let alone on a sustained basis.

 

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Discuss this Blog Entry 2

James McGrann (not verified)
on Jan 29, 2014

The fact that Americans spend a smaller portion of income for food is significant when evaluating food demand to other countries.

Anonymous (not verified)
on Jan 29, 2014

Is the RBDI on a per capita basis, or just overall consumption?

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