Beef production is falling at the end of 2013 and is expected to fall sharply in the coming year. This reduction in beef supply will add significant additional pressure to increase wholesale and retail beef prices. This leads to much concern in the beef industry that beef will “price itself out of the market”. These concerns are understandable and there is indeed much uncertainty about beef markets for the next couple of years. However, it is important to remember how demand works and keep in mind the many factors involved in demand. While there is concern that consumers will buy less beef with higher prices, it is important to keep in mind that there will be less beef on the market and thus a need to ration beef. The economic principle of demand is based on the concept that when a smaller quantity is available, higher prices will ration beef to those consumers who are most willing and able to purchase beef. In general, the idea that higher prices will restrict consumption of beef is precisely what will be needed to balance supply and demand in the coming months.
However, beef demand is very complex. Beef is not a single market but rather consists of many distinct but related markets. At higher prices, there will be much substitution between beef products and also with other protein sources. The unprecedented beef market situation makes it very difficult to know exactly how consumers will adjust the mix of beef products as well as total quantity of beef consumption at record price levels. Quality will be of paramount importance in beef markets at record prices. Especially for middle meats, the ability to support premium beef prices will depend on consistently providing a premium product. The recent increase in Choice grading percentage, due partially to reduced use of beta agonists, may be particularly timely in improving the quality mix of a limited beef supply.
Competing meats will be particularly important as beef pushes to ever higher prices. Both pork and poultry production are expected to increase in 2014, providing more competition with increased availability and moderate prices. Pork production has been tempered in late 2013 by production losses due to the Porcine Epidemic Diarrhea virus (PEDv), which so far has not been controlled. Pork production is currently expected to increase roughly 2.5 percent year over year but if PEDv is controlled a bigger jump in production could occur sometime during 2014. Continued growth in pork exports may relieve much of the pressure on domestic markets, limiting U.S. pork consumption to a less than one percent increase. The broiler industry has spent much of 2013 ramping up production and is expected to increase nearly 4 percent in 2014. Again, expanded broiler exports may take a large percentage of the increase off-shore but U.S. broiler consumption is still expected to increase roughly 2.5 percent in 2014. Wholesale broiler product prices increased in the middle of 2013 but wholesale prices for breasts, wings and legs have dropped sharply recently suggesting perhaps that the broiler market is not getting as much demand support as expected from higher beef prices.