Two things are certain: Fed cattle are commanding the highest prices in history, and the Beef Demand Index (BDI) calculated to gauge consumer beef demand has been declining for the past two years.

What gives?

The consumer dipstick

“Measuring year-to-year changes in consumer demand for beef at retail is difficult,” says James Mintert, a Kansas State University Extension livestock marketing specialist. He maintains the industry BDI, which was created 10 years ago by Wayne Purcell, Alumni Distinguished Professor Emeritus at Virginia Tech.

Mintert explains, “We know that as the quantity of beef available in the marketplace changes, the market-clearing beef price will change. Typically, consumers are willing to consume larger quantities of beef only at lower prices, and they are willing to pay higher prices for beef when the quantity of beef available declines. These shifts in available supplies essentially trace movement along an existing, downward-sloping demand curve.

“Shifts in consumer demand occur, however, when the entire demand curve shifts, either up or down, because of a change in myriad other factors that affect consumer demand. Examples include changes in consumers' disposable income, availability of competing meat products, or consumers' dietary preferences, perhaps because of concerns about health or caloric consumption.”

For instance, it's more than coincidence that consumer beef demand increased as Americans turned the high-protein, low-carbohydrate diet notion from a simmering idea into a full-fledged fad, and then abandoned it just as quickly.

Explaining the apparent dichotomy between the BDI, fed-cattle prices and shorter-term demand spikes in the wholesale beef price is more complex.

Mixed but not matched

First, demand for cattle and demand for beef are not the same, though they are related over the long haul.

“The fact that processors are bidding aggressively for live cattle in the short-run is good news if you're a producer, but it doesn't say anything about consumer demand for beef,” Mintert says. “Retail demand for beef at the live level is derived from demand for beef at the retail level. But a big factor impacting live cattle demand is how willing processors are to increase or decrease their margins. We have excess slaughter capacity, and some processors are willing to bid away some of their margins to operate closer to capacity.”

For similar reasons, Mintert also cautions that strong wholesale demand — as the industry experienced during the first quarter of this year — is positive news for producers, but it doesn't directly address whether domestic retail beef is increasing or decreasing.

Add to these factors the growing segregation within beef offerings based on consumer demand for diverse quality attributes and convenience.

“We continue to see more differentiated markets, more branded and niche markets, many of them related to quality,” says Randy Blach, Cattle-Fax executive vice president. “We continue to see strong demand for premium Choice (upper two-thirds of the Choice grade), for Prime and for some of the niche markets.”

The Choice-Select spread continues to run at the widest annual average in history. It was more than $9 the second week of April. “I wouldn't be surprised to see it grow to $20 to $25 seasonally,” Blach says.

This spring, Mintert expected the Choice-Select spread to eclipse last June's decade-high $23.08. He adds that the growing price disparity between the two grades represents supply, demand and the increased cost of producing beef that grades higher (more later).

Moreover, there's growing consumer interest in specialized markets such as organic and natural beef.

“The beef industry is becoming more disaggregated. There are more niche markets, and some of those will perform differently than the aggregate of the industry,” Mintert says.

Blach emphasizes, “A much higher percentage of beef is branded today than it was 10 years ago, and we think we'll see that accelerate in the next five years. Food service continues to gain percentage sales over retail, and there are opportunities to differentiate there as well… Bottom line, demand is strong. I think the growth in high-quality markets will continue. Everything I look at tells me the market can grow the supply of premium Choice and Prime cattle without impacting the premiums significantly.”

Using BDI as a measure

The BDI was not designed to account for all of this give and take between market segments. Nor was it designed to gauge consumer demand for individual product categories.

Mintert will be the first to tell you the index is not a perfect reflection of demand. “The index tells you that domestic retail beef demand is shifting and by how much, but it doesn't tell you why it's shifting,” he explains.

Moreover, the BDI accounts for Choice beef sold at retail, based on prices reported by USDA. It doesn't account for all grades, nor for beef sales in the growing food service industry.

The BDI though, continues to provide something no other industry measure ever has: a glimpse at how much consumers want beef (not how much processors or retailers think consumers want it) via prices for fed cattle and boxed beef.

“The underlying reason the index was created was to provide information about what is happening at the consumer level,” Mintert says.

“Maybe the message is that the market is changing and that one demand index may not tell us the whole story. Given the increased segregation of the marketplace, that's asking an awful lot of one index,” Blach says.

At its March meeting, the Cattlemen's Beef Board (CBB) Joint Evaluation Committee re-stoked the Beef Demand Study Group, which originated the BDI. CBB reports say this group will, “…review the basis for the Demand Index and determine if it is still a reasonably sound trend marker.”

Choosing demand direction

“The recent retail beef demand downturn began in 2005, so the recent downtrend is relatively short. Still, my concern is that, looking ahead, we could see a return to year after year declines in domestic retail beef demand, similar to what we saw in the 1980s and during much of the 1990s,” Mintert says. He emphasizes that's based at retail and on the domestic market.

Painting with a big brush, consumer beef demand declined from 1980 through most of 1998. With the exception of a blip in 2002, beef demand surged ahead from the last quarter of 1998 through 2004. Since then, demand has been declining. The question is whether the growth spurt until 2004 was a blip in an ongoing, long-term decline, or whether the past two years are a blip in long-term resurgent demand.

Perhaps both are the new reality. Maybe demand for average beef is slipping, while demand for products that come with a promise beyond basic nutrition continues to buy more of those pounds at higher prices.

Blach views such a dichotomy as an opportunity for the industry. He points out increasing consolidation in cattle feeding, beef packing, retailing and beef herds creates more opportunity for product differentiation, meaning that producers have more opportunities. Such opportunities are a key to countering rising input costs, he says.

Consider that fed cattle averaged just over $100/cwt. the first week of April, $18 more than the same time a year earlier.

“Even though prices are that much higher, we're not making a lot more money because costs have gone so much higher. Can we push some of these increased costs on to the consumer?” wonders Blach. “I think we may all have to change the way we view beef prices. I think we've all had the mindset that there is a price point at which we won't be able to sell beef. Why can't we sell it at higher prices? We need to see at what price levels we can still sell this quantity of product.”

One thing seems apparent, cyclical herd growth will be limited again this year. According to Blach, “High feed costs are a major impediment to expansion. Based on cow slaughter so far this year, you can argue that we won't see much expansion in 2007.”

Even if the past two years represent a blip upon a trend of sustained consumer demand growth, Mintert stresses the industry needs to continue doing the things that grew demand to begin with.

“As you look across the food spectrum and what consumers are willing to pay for, it's convenience and quality,” Mintert explains. “Once you reach that conclusion, you have to ask how the industry is moving forward on those fronts. If you're not moving forward, by definition you're moving backward because the rest of the food industry is indeed moving forward.

“We can point to some success stories, the creation of products that are more convenient, tasty and nutritious. But we need a steady stream of those innovations. We're doing some of those things, but a big chunk of the meat case still looks like it did for a lot of years.”

Read the full State of the Industry report (.pdf)